24A — March 15 - 28, 2013 — 1031 Exchange — Mid Atlantic Real Estate Journal
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1031 E xchangE
By Michael S. Brady, Esq., CES, Riverside 1031 Building on the 1031 Exchange
I
nvestors commonly use 1031 exchanges to defer capital gain taxes by
“improvement” or a “build to suit” exchange. Title to the replacement property is
is solely owned by the quali- fied intermediary facilitating the exchange. At the time
ments to the property during the balance of their exchange period, using a portion of the sales proceeds from the relinquished property to pay for the construction. Once the work is completed or the exchange period is about to expire, the EAT will transfer the property to the investor at its improved value. For example, if an inves- tor sells a property for $1 million, they will need to acquire a replacement prop- erty worth at least $1 million to fully defer their capital gain taxes. Suppose they find an ideal property that is
worth only $700,000, but the property needs renovations, like replacing the roof and windows, and repaving the parking lot? In a properly structured improvement ex- change, the EAT will acquire title from the seller of the property, using a portion of the sales proceeds to pay the purchase price. Then, during the balance of the exchange period, the EAT will use the remaining sales proceeds to make those renovations. If the capital improvements cost at least $300,000, the investor will fully defer the taxes on their capital gain. Unfortunately, the ex- change period is a maximum of 180 days, so there is not much time to complete the necessary work. Therefore, an improvement exchange is usually easier to accomplish with the rehabilitation of an existing structure, compared to building a new structure on vacant land. Additionally, the exchange funds cannot be used to make improvements to a property that is already owned by the investor. Nor is it sufficient to just purchase supplies during the exchange period; the work must actu- ally be completed, and the progress of the construction should be documented. It is also critical that both the re- placement property and the planned improvements be identified during the 45 day identification period. Finally, the work performed must be considered capital improve- ments, as opposed to routine maintenance and repairs. As improvement exchanges are more complex than the typical 1031 exchange, ad- vanced planning is essential. The taxpayer’s attorney and accountant must both be involved in structuring the transaction, and a knowl- edgeable qualified intermedi- ary should be contacted early in the process. As many investors are fac- ing tax rate increases, the improvement exchange has become an even more valu- able tool, allowing them to both save taxes and modify their replacement property to better suit their invest- ment objectives. Michael S. Brady, Esq. is a Certified Exchange Specialist and serves as Corporate Counsel for Riverside 1031 LLC. n
exchanging their prop- erty for oth- er like-kind p r o p e r t y. H o w e v e r , few inves- tors realize that their sal es pro -
As many investors are facing tax rate increases, the improvement exchange has become an even more valuable tool, allowing them to both save taxes and modify their replacement property to better suit their investment objectives.
Michael S. Brady
ceeds can also be used to pay for construction costs and to make capital improvements to a replacement property. This type of 1031 exchange is often referred to as an
“parked” with an “Exchange Accommodation Titleholder” or “EAT”, which is usually a limited liability company that
of the acquisition, the EAT can enter into a construction agreement with the investor. They can thenmake improve-
Deferringgain. Creatingwealth. Andmakingwaves.
Servicing all of your 1031 Exchange needs!
Shaul C.Greenwald,Esq. MichaelS.Brady,Esq. YoelZagelbaum,Esq.
3839 Flatlands Avenue, Suite 208, Brooklyn, NY 11234
Phone: 718.226.0300 info@rs1031.com www.rs1031.com
Toll Free 855.268.6430
from your friends at
Riverside has already taken the real estate industry by storm as a full-service, national title agency with the ability to guarantee successful closings. Now, Riverside 1031 continues to make waves as an IRC §1031 Exchange Qualified Intermediary. Led by Michael S. Brady, Esq., a Certified Exchange Specialist® with many years of experience, Riverside 1031 offers strategic tax deferral solutions to be�er preserve your clients’ assets...and your sterling reputation.
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