<p>In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. <em>(To read more about 1031 exchange process and rules, visit our <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="1031 explained">1031 explained</a> page)</em> In places like Miami or Jacksonville, Florida attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?</p>

<p>Luckily, the <a href="https://www.accruit.com/blog/1031-like-kind-exchanges-myths-vs-realitie…; title="1031 exchange rules">1031 exchange rules</a> provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.</p>

<p><strong>Reverse 1031 Exchanges</strong></p>

<p>Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “<a href="https://www.accruit.com/blog/primer-1031-exchanges-and-related-types-ex…; title="reverse 1031 exchange">reverse 1031 exchange</a>”.</p>

<p>The reverse exchange technique essentially consists of an exchange facilitator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange company affiliate transfers the new property to the taxpayer. This 'technically' creates the proper sequence.</p>

<p>For example, an investor holding a commercial investment property in Jacksonville, Florida is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Tampa Bay. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Jacksonville property and has 180 days to close on the sale to defer their gain into the newly purchased Tampa Bay property.</p>

<p><strong>Build-to-Suit or Improvement Exchange</strong></p>

<p>Build-to-Suit, also known as Construction-to-Suit or <a href="https://www.accruit.com/blog/can-property-improvement-costs-be-part-103…; title="improvement exchange">Improvement Exchange</a> refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.</p>

<p>In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.</p>

<p>For example, an investor owns an apartment rental in Miami, Florida and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an <a href="https://www.accruit.com/blog/case-study-property-improvement-exchange-r…; title="improvement exchange of real estate">improvement exchange of real estate</a> whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.</p>

<p>As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing <a href="mailto: info@accruit.com" title="info@accruit.com">info@accruit.com</a> for more information.</p>

<hr />
<p>&nbsp;</p>
<!--HubSpot Call-to-Action Code -->

<p style="text-align:center"><a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/07878ab4-b454-43a…; target="_blank"><img alt="Start Your 1031 Exchange with Accruit today" class="hs-cta-img" height="221" id="hs-cta-img-07878ab4-b454-43ab-90e0-95efb684dc56" src="https://no-cache.hubspot.com/cta/default/6205670/07878ab4-b454-43ab-90e…; style="border-width:0px;" width="600" /></a></p>

<p>In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. <em>(To read more about 1031 exchange process and rules, visit our <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="1031 explained">1031 explained</a> page)</em> In places like Miami or Jacksonville, Florida attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?</p>

<p>Luckily, the <a href="https://www.accruit.com/blog/1031-like-kind-exchanges-myths-vs-realitie…; title="1031 exchange rules">1031 exchange rules</a> provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.</p>

<p><strong>Reverse 1031 Exchanges</strong></p>

<p>Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “<a href="https://www.accruit.com/blog/primer-1031-exchanges-and-related-types-ex…; title="reverse 1031 exchange">reverse 1031 exchange</a>”.</p>

<p>The reverse exchange technique essentially consists of an exchange facilitator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange company affiliate transfers the new property to the taxpayer. This 'technically' creates the proper sequence.</p>

<p>For example, an investor holding a commercial investment property in Jacksonville, Florida is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Tampa Bay. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Jacksonville property and has 180 days to close on the sale to defer their gain into the newly purchased Tampa Bay property.</p>

<p><strong>Build-to-Suit or Improvement Exchange</strong></p>

<p>Build-to-Suit, also known as Construction-to-Suit or <a href="https://www.accruit.com/blog/can-property-improvement-costs-be-part-103…; title="improvement exchange">Improvement Exchange</a> refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.</p>

<p>In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.</p>

<p>For example, an investor owns an apartment rental in Miami, Florida and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an <a href="https://www.accruit.com/blog/case-study-property-improvement-exchange-r…; title="improvement exchange of real estate">improvement exchange of real estate</a> whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.</p>

<p>As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing <a href="mailto: info@accruit.com" title="info@accruit.com">info@accruit.com</a> for more information.</p>

<hr />
<p>&nbsp;</p>
<!--HubSpot Call-to-Action Code -->

<p style="text-align:center"><a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/07878ab4-b454-43a…; target="_blank"><img alt="Start Your 1031 Exchange with Accruit today" class="hs-cta-img" height="221" id="hs-cta-img-07878ab4-b454-43ab-90e0-95efb684dc56" src="https://no-cache.hubspot.com/cta/default/6205670/07878ab4-b454-43ab-90e…; style="border-width:0px;" width="600" /></a></p>

<p>In considering selling an investment property in a red-hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a 1031 tax deferred exchange can feel like too small a window when supply is limited and there many bidders in the market. <em>(To read more about 1031 exchange process and rules, visit our <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="1031 explained">1031 explained</a> page)</em> In places like Miami or Jacksonville, Florida attractive properties will receive multiple offers on the first day of listing and can go pending same day. In a fast-paced real estate market, investors are left wondering what do you do when you still want to defer your taxable gain while taking advantage of a fast-paced real estate market from a seller's perspective?</p>

<p>Luckily, the <a href="https://www.accruit.com/blog/1031-like-kind-exchanges-myths-vs-realitie…; title="1031 exchange rules">1031 exchange rules</a> provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.</p>

<p><strong>Reverse 1031 Exchanges</strong></p>

<p>Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “<a href="https://www.accruit.com/blog/primer-1031-exchanges-and-related-types-ex…; title="reverse 1031 exchange">reverse 1031 exchange</a>”.</p>

<p>The reverse exchange technique essentially consists of an exchange facilitator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange company affiliate transfers the new property to the taxpayer. This 'technically' creates the proper sequence.</p>

<p>For example, an investor holding a commercial investment property in Jacksonville, Florida is looking to take advantage of the market to sell their property but is concerned about finding the right replacement property in Tampa Bay. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Jacksonville property and has 180 days to close on the sale to defer their gain into the newly purchased Tampa Bay property.</p>

<p><strong>Build-to-Suit or Improvement Exchange</strong></p>

<p>Build-to-Suit, also known as Construction-to-Suit or <a href="https://www.accruit.com/blog/can-property-improvement-costs-be-part-103…; title="improvement exchange">Improvement Exchange</a> refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.</p>

<p>In this type of exchange, the exchange facilitator parks there placement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.</p>

<p>For example, an investor owns an apartment rental in Miami, Florida and wants to invest in single-family rentals. However, the only single-family rentals for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an <a href="https://www.accruit.com/blog/case-study-property-improvement-exchange-r…; title="improvement exchange of real estate">improvement exchange of real estate</a> whereby the purchase price and improvements to the new multi-family complex can be funded through the tax deferred proceeds of the sale of the apartment rental.</p>

<p>As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. Accruit is well versed in executing all types of exchanges. You can reach our offices by calling (800) 237-1031 or emailing <a href="mailto: info@accruit.com" title="info@accruit.com">info@accruit.com</a> for more information.</p>

<hr />
<p>&nbsp;</p>
<!--HubSpot Call-to-Action Code -->

<p style="text-align:center"><a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/07878ab4-b454-43a…; target="_blank"><img alt="Start Your 1031 Exchange with Accruit today" class="hs-cta-img" height="221" id="hs-cta-img-07878ab4-b454-43ab-90e0-95efb684dc56" src="https://no-cache.hubspot.com/cta/default/6205670/07878ab4-b454-43ab-90e…; style="border-width:0px;" width="600" /></a></p>

<p class="MsoNormal">In considering selling an investment property in a hot real estate market through a 1031 exchange, owners are rightfully concerned about finding a suitable replacement property. The 45-day identification rules under a <a href="https://www.accruit.com/blog/%C2%ADare-tax-deferred-exchanges-real-esta… tax deferred exchange</a> can feel like too small a window when supply is limited and there are many bidders in the market. <i>(To read more about 1031 exchange process and rules, visit our <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="1031 Exchange Explained">1031 exchange explained</a> page)</i> In places like Denver, Colorado or Salt Lake City, Utah attractive properties will receive multiple offers on the first day of listing and can go pending same day. So, what do you do when you still want to defer your taxable gain while taking advantage of a hot real estate market from a seller's perspective?<o:p></o:p></p>

<p class="MsoNormal">Luckily, the <a href="https://www.accruit.com/property-owners/1031-exchange-explained"><span style="color:windowtext;text-decoration:none;text-underline:none">1031 exchange </span>rules</a><span style="mso-spacerun:yes">&nbsp; </span>provide alternatives to the traditional exchange that can be beneficial in a tight market. These alternatives are deemed Reverse 1031 Exchanges and Improvement 1031 Exchanges.<span style="mso-spacerun:yes">&nbsp; </span><o:p></o:p></p>

<p class="MsoNormal"><o:p></o:p></p>

<h3 class="MsoNormal"><span style="mso-ascii-font-family:Calibri;mso-hansi-font-family:
Calibri;mso-bidi-font-family:Calibri">Reverse 1031 Exchanges</span><o:p></o:p></h3>

<p class="MsoNormal">Under the Treasury Regulations, exchanges must be completed in the proper sequence. This means the sale of the relinquished property must take place before the acquisition of the new or replacement property. However, on occasion, the facts are such that a taxpayer wishes to acquire the new property before the sale or risk losing the desired new property. This reverse sequence is often referred to as a “<a href="https://www.accruit.com/blog/primer-1031-exchanges-and-related-types-ex… 1031 exchange</a>” and codified in the tax code.<span style="mso-spacerun:yes">&nbsp; </span><o:p></o:p></p>

<p class="MsoNormal">The reverse exchange technique essentially consists of an exchange facilitator holding or “parking” title to the new property on behalf of the taxpayer to avoid the taxpayer having simultaneous ownership of two properties. Immediately after the sale of the old property (but no later than 180 days) the exchange company affiliate transfers the <span style="mso-spacerun:yes">&nbsp;</span>new property to the taxpayer. This 'technically' creates the proper sequence.<o:p></o:p></p>

<p class="MsoNormal">For example, an investor holding a multi-family rental property in Denver is looking to take advantage of the hot market to sell their property but is concerned about finding the right replacement property in Colorado Springs. That investor decided to wait to list their property and found the perfect property replacement 60 days later and purchased it through a Reverse Exchange with the help of an exchange facilitator. Upon closing on the new purchase, the investor can now continue earning rental income on the Denver property and has 180 days to close on the sale to defer their gain into the newly purchased Colorado Springs property.<span style="mso-spacerun:yes">&nbsp; </span><o:p></o:p></p>

<h3 class="MsoNormal"><span style="mso-ascii-font-family:Calibri;mso-hansi-font-family:
Calibri;mso-bidi-font-family:Calibri">Build-to-Suit or Improvement Exchange</span><o:p></o:p></h3>

<p class="MsoNormal">Build-to-Suit, also known as Construction-to-Suit or <a href="https://www.accruit.com/blog/can-property-improvement-costs-be-part-103… Exchange</a> refers to a type of exchange done where some of the proceeds of the sale of the relinquished property will be used to complete improvements on the replacement property so that the taxpayer can finalize the exchange where both the value of the land and the enhanced improvements will count for the amount the taxpayer traded for. Investors may want to build on raw land or put in new heating, ventilating, air conditioning, roof, and windows on an existing property. All of which can qualify if executed properly.<o:p></o:p></p>

<p class="MsoNormal">In this type of exchange, the exchange facilitator parks the replacement property on behalf of the taxpayer while the desired improvements are made. Upon the earlier 180 days or the completion of the improvements, the entire value of the real property and improvements is conveyed directly to the taxpayer to complete their exchange.<o:p></o:p></p>

<p class="MsoNormal">As an example, an investor owns a commercial property in Salt Lake City and wants to invest in new vacation rental units in Park City. However, the only homes for sale need significant improvements to command a premium rental income. The investor can engage an exchange facilitator to consummate an <a href="https://www.accruit.com/blog/case-study-property-improvement-exchange-r… exchange of real estate</a> whereby the purchase price and improvements to the vacation rental properties can be funded through the tax deferred proceeds of the sale of the commercial property in Salt Lake City.<span style="mso-spacerun:yes">&nbsp; </span><o:p></o:p></p>

<p class="MsoNormal">As you can see, tools are available to real estate investors to defer taxes and grow their portfolios in any environment. <a href="https://www.accruit.com/&quot; title="Accruit">Accruit</a> is well versed in executing all types of exchanges. You can reach our Headquarters in Denver, Colorado or our Western Regional Office in Dillion, Montana by calling (800) 237-1031 or emailing <a href="mailto:info@accruit.com">info@accruit.com</a&gt; for more information. <o:p></o:p></p>
<!--HubSpot Call-to-Action Code -->

<hr />
<p>&nbsp;</p>

<h2>THE SITUATION</h2>

<p>Greg and Peter are brothers who have each inherited some money. After the relevant estate and/or inheritance taxes, they each received $160,000. They each want to invest in real estate, but they disagree on the strategy. They both have full-time careers, so their strategies need to account for those obligations as well. Greg plans to buy something to fix and then flip, hopefully for a profit. Peter would like to buy something to rehab and then rent. Working together, they find two homes in the same neighborhood, and complete their acquisitions approximately 3 months after receiving their inherited funds, each spending $160,000. They immediately commence making repairs and upgrades in the spare time. After about 10 weeks, they have both completed their rehab work, and have each spent $45,000 in the process. Both Greg and Peter now have $205,000 invested into their respective properties. This number constitutes their basis in the property for determining taxation at a time of future sale of the property.</p>

<p>Greg believes that he can sell his property for $225,000, earning him a $20,000 profit ($12,150 after brokerage commissions and transfer taxes). To compound his tax burdens, because Greg has owned the property for less than one year, he will be subject to short-term capital gains taxes, which are equal to his highest marginal income tax rate. Peter plans to hold his property and is confident that he can rent his property for $1,600 per month, or $19,200 for the first year.</p>

<h2>THE PROBLEM</h2>

<p>From the date Greg purchased his property until the date he sold it was a grand total of six months. When Greg sold his fix-and-flip property, he was introduced to the buyer by the buyer’s real estate agent. Thus, he will be paying a 3% fee to the broker, as well as state and federal taxes on his profits:</p>

<table align="center" border="0" cellpadding="5" cellspacing="1" style="width:750px;">
<tbody>
<tr>
<td>Brokerage Commission</td>
<td>($225,000 x 3%)</td>
<td>$6,750</td>
</tr>
<tr>
<td>State R/E Transfer Taxes</td>
<td>(estimated)</td>
<td>$1,000</td>
</tr>
<tr>
<td>Federal Short-term Capital Gain Tax</td>
<td>($12,150 x 35%)</td>
<td>$4,252</td>
</tr>
<tr>
<td>State Short-term Capital Gains Tax</td>
<td>(estimated 6%)</td>
<td>$729</td>
</tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td><strong>Net cash after taxes and expenses</strong></td>
<td>&nbsp;</td>
<td><strong>$212,168</strong></td>
</tr>
<tr>
<td>&nbsp;</td>
<td>(Total Tax &amp; Expense Loss 5.7%)</td>
<td>&nbsp;</td>
</tr>
<tr>
<td>Net profit after taxes and expenses</td>
<td>($212,168 - $205,000)</td>
<td>$7,168</td>
</tr>
<tr>
<td><strong>Return on Investment</strong></td>
<td><strong>($7,168/$205,000)</strong></td>
<td><strong>3.5%</strong></td>
</tr>
</tbody>
</table>

<h2>THE SOLUTION</h2>

<p>Peter listed his property for rent, and the new tenant moved in on the same day that Greg sold his property. Peter’s tenant will be paying $1,900 month, or $22,800 for the year. Peter’s tax situation at the end of the year is a little different:</p>

<table align="center" border="0" cellpadding="5" cellspacing="1" style="width:750px;">
<tbody>
<tr>
<td>Federal Income Tax</td>
<td>($19,200 x 35%)</td>
<td>$6,720</td>
</tr>
<tr>
<td>State Income Tax</td>
<td>(estimated 6%)</td>
<td>$1,152</td>
</tr>
<tr>
<td>Total Taxes</td>
<td>&nbsp;</td>
<td>$7,872</td>
</tr>
<tr>
<td>Total estimated tax owed</td>
<td>($19,200 - $7,872)</td>
<td>$11,238</td>
</tr>
<tr>
<td><strong>Return on Investment</strong></td>
<td><strong>($11,328/$205,000)</strong></td>
<td><strong>5.5%</strong></td>
</tr>
</tbody>
</table>

<p>In our current example, it took Greg three months to find and buy the first property. It then took him six months to make the repairs and sell it, for a total investment cycle of 9 months. If Greg is aggressive, he can accomplish four of these fix-and-and flip transactions in three years:</p>

<table align="center" border="0" cellpadding="5" cellspacing="1" style="width:750px;">
<tbody>
<tr>
<td><em>Transaction 1:</em></td>
<td>&nbsp;</td>
</tr>
<tr>
<td>Invested</td>
<td>$205,000</td>
</tr>
<tr>
<td>Sold</td>
<td>$225,000</td>
</tr>
<tr>
<td>Net after commission/taxes</td>
<td>$212,168</td>
</tr>
<tr>
<td>Cash profit</td>
<td>$7,168</td>
</tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td><em>Transaction 2:</em></td>
<td>&nbsp;</td>
</tr>
<tr>
<td>Invested</td>
<td>$212,168</td>
</tr>
<tr>
<td>Sold</td>
<td>$233,000</td>
</tr>
<tr>
<td>Net after commission/taxes</td>
<td>$219,719</td>
</tr>
<tr>
<td>Cash profit</td>
<td>$7,551</td>
</tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td><em>Transaction 3:</em></td>
<td>&nbsp;</td>
</tr>
<tr>
<td>Invested</td>
<td>$219,719</td>
</tr>
<tr>
<td>Sold</td>
<td>$241,000</td>
</tr>
<tr>
<td>Net after commission/taxes</td>
<td>$227,263</td>
</tr>
<tr>
<td>Cash profit</td>
<td>$7,544</td>
</tr>
<tr>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td><em>Transaction 4:</em></td>
<td>&nbsp;</td>
</tr>
<tr>
<td>Invested</td>
<td>$227,263</td>
</tr>
<tr>
<td>Sold</td>
<td>$249,000</td>
</tr>
<tr>
<td>Net after commission/taxes</td>
<td>$234,807</td>
</tr>
<tr>
<td>Cash profit</td>
<td>$7,544</td>
</tr>
<tr>
<td><strong>3-year total profits</strong></td>
<td><strong>$29,807</strong></td>
</tr>
</tbody>
</table>

<p>In three years of fixing and flipping houses, Greg has netted a total of $29,807 in income. In this same time period, Peter has rented his property for $19,200 per year for the three years, netting $11,328 per year or $33,984, about 14% more than Greg netted.</p>

<p><br />
Peter is now considering selling his property as part of a Section 1031 Exchange. Historically, the national average for real estate appreciation is about 3.8% per year. Thus, Peter expects to sell his original investment property for about $250,000 (which is comparable to the value of Greg’s last sale at $249,000). If Peter sells his property outright, he can expect to pay taxes as follows:</p>

<table align="center" border="0" cellpadding="5" cellspacing="1" style="width:750px;">
<tbody>
<tr>
<td>Federal Capital Gain Tax</td>
<td>($45,000 x 20%)</td>
<td>$9,000</td>
</tr>
<tr>
<td>Affordable Care Act Surcharge</td>
<td>($45,000 x 3.8%)</td>
<td>$1,710</td>
</tr>
<tr>
<td>State Capital Gains Tax</td>
<td>($45,000x6%)</td>
<td>$2,700</td>
</tr>
<tr>
<td><strong>Total Taxes</strong></td>
<td>&nbsp;</td>
<td><strong>$13,410</strong></td>
</tr>
</tbody>
</table>

<p style="margin-bottom:11px">&nbsp;</p>

<p>Peter’s tax advisor has explained the value of an IRC Section 1031 tax-deferred exchange. Peter now knows that he can effectively defer recognition of $13,410 in state and federal taxes by structuring his transaction as part of a 1031 exchange. Accordingly, upon the sale of the property, the exchange proceeds will be sent directly to Peter’s qualified intermediary (“QI”) to be held until the purchase of his replacement property.</p>

<p><br />
Within 45 days after the closing on the sale, Peter properly identified his replacement property. (More information about identification and receipt of replacement properties can be found at <a href="https://www.accruit.com/blog/what-are-rules-identification-and-receipt-…; style="color:#0563c1; text-decoration:underline">Rules for Identification and Receipt of Replacement Property</a>.) Closing on his replacement property acquisition occurred well within the 180-day exchange period, utilizing the exchange proceeds held by the QI.</p>

<p>&nbsp;</p>

<h2>THE RESULT</h2>

<p>Greg spent much of his free time over the past three years managing the upgrades and renovations at four fix-and-flip properties. Three years on, Greg has limited options with his property. He cannot currently participate in a 1031 exchange like Peter. He could continue his path of fix-and-flip, spending much of his free time managing the improvements on each new property. He could also consider changing to Peter’s strategy and renting his current property.</p>

<p>During the same three years, Peter enjoyed the relatively passive income afforded by his rental property, earning about 14% more income in the process. At the same time, the net value of the real estate that the two brothers held at the end of the four years was virtually identical.</p>

<p><a href="https://www.accruit.com/property-owners/1031-exchange-explained#simple-… the step-by-step processes</a> involved in completing a tax-deferred exchange, which you may review with your tax and legal advisors.</p>

<h2>What is a build-to suit or 1031 improvement exchange?</h2>

<p>Often a taxpayer will sell his old property (the relinquished property) for a greater value than the cost of purchasing the new property (the replacement property).&nbsp; If nothing further is done, the excess value that is not reinvested is taxable and referred to as "boot" in the context of an Internal Revenue Code (IRC) <a href="/services/1031-exchange">1031 exchange</a>.&nbsp; However, if the new property is land to be constructed upon (a <a href="/property-owners/1031-exchange-explained#non-safe-harbor">build-to-suit exchange</a>) or consists of land with a structure on it that needs further improvements (a property improvement exchange), it is possible for the improvement costs to be incurred prior to the exchange.&nbsp; As is the case with many IRC §1031 procedures, there are safe harbor provisions which must be closely adhered to.&nbsp;</p>

<p>Many people assume that so long as the taxpayer uses exchange proceeds to acquire the new property and makes the improvements within the 180-day window for an exchange, the taxpayer can include the cost of the improvements into the value of the new property.&nbsp; However, <a href="/exchange-library/internal-revenue-service-regulations-irc-§1031">IRC §1031 regulations</a> require a valid exchange to consist of like-kind properties being exchanged.&nbsp; Hiring a contractor or other service provider and paying for labor and materials is not like-kind to the sale of real estate.&nbsp; As expressed by the IRS the problem is as follows:</p>

<blockquote>
<p>"The transfer of relinquished property is not within the provisions of Section 1031(a) if the relinquished property is transferred in exchange for services. Thus any additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of a like kind." (Reg § 1.1031(k)-1(e)(4)).</p>
</blockquote>

<p>The exchange regulations became effective in 1991.&nbsp; Approximately ten years later, in 2001, the IRS issued <a href="/exchange-library/rev-proc-2000-37-reverse-exchanges">Revenue Procedure 2000-37</a> part of which dealt with this situation.&nbsp; The IRS came up with the idea of a Qualified Exchange Accommodation Titleholder, an entity able to work around the issue of improvements not being like-kind to the taxpayer's old property.&nbsp; Revenue Procedure 2000-37 refers to this entity as an "Exchange Accommodation Titleholder," now commonly called an EAT.</p>

<p>There are many companies that act as qualified intermediaries for conventional forward exchanges, and a limited number of those companies are also set up to provide EAT services.&nbsp; Selecting a knowledgeable qualified intermediary is critical to the success of the transaction (Read why in my recent discussion about the <a href="/blog/all-tax-deferred-exchange-companies-are-not-created-equal">Case of Kreisers Inc. v. First Dakota Title Limited Partnership</a>).</p>

<h2>How does the use of an EAT help in an exchange involving improvements?</h2>

<p>The EAT can acquire title to the new property on behalf of the taxpayer and to "park" it&nbsp; until the improvements are in place (but in no event beyond 180 days).&nbsp; Once the EAT transfers ownership of the property to the taxpayer, the taxpayer has acquired improved real estate, which then includes the value of the improvements that were made during the parking period.&nbsp; For the mutual benefit of the taxpayer and the EAT, it is customary for the EAT to take title to the property using a special purpose entity, usually a limited liability company (LLC).&nbsp; This insulates the client's exchange transaction from other clients' transactions as well as from the affairs of the exchange company acting as the EAT.</p>

<h2><img alt="build to suit 1031 exchange" src="/sites/default/files/files/property-improvement-exchange-2.jpg" style="width:400px; height:300px; margin-left:5px; margin-right:5px; float:right" /></h2>

<h2>What's the difference between how forward and reverse build-to-suit or improvement exchanges are structured?</h2>

<p>A build-to-suit or improvement exchange can take two different forms.&nbsp; The first occurs when the taxpayer has sold property and funded the exchange account prior to the acquisition date of the new property.&nbsp; The exchange funds can pass to the EAT to cover the purchase price of the new property.&nbsp; The balance of the funds are given to the EAT as necessary to cover the costs associated with making the improvements.&nbsp; This is known as a forward build-to-suit or property improvement exchange.</p>

<p>If the taxpayer wants to begin the improvements before the sale of the old property,&nbsp; a reverse build-to-suit or property improvement exchange is necessary, since the sequence of buying (by the EAT) and selling is "reverse" from a normal exchange. In the case of a reverse transaction, since the exchange account it not yet funded, funding of the purchase price and improvements needs to be provided to the EAT from a bank or taxpayer loan or sometimes both.&nbsp; These loans get paid back at the conclusion of the transaction when the exchange funds are used by the taxpayer to acquire the property from the EAT.</p>

<h2>Do all of the improvements need to be made during the 180-day parking period?</h2>

<p>It is not necessary for the improvements to be completed during the parking period, however the taxpayer only gets credit for the value of the land and improvements that are in place at the time the taxpayer takes direct ownership.&nbsp; The taxpayer can make additional improvements after the exchange has taken place.</p>

<h2>What flexibility does Revenue Procedure 2000-37 allow in a build-to-suit or property improvement exchange?</h2>

<p>Revenue Procedure 2000-37 contains some very taxpayer friendly provisions including:</p>

<ul>
<li>The terms of any build-to-suit/property improvement contract between the taxpayer and EAT do not have to be at arm's length.</li>
<li>The taxpayer may loan funds directly to the EAT.</li>
<li>The taxpayer is permitted to guaranty any bank loan made to the EAT.</li>
<li>The taxpayer may indemnify the EAT for costs and expenses incurred.</li>
<li>The taxpayer or a "disqualified person" (generally an agent of the taxpayer) may advance funds to the EAT.</li>
<li>The property may be leased by the EAT to the taxpayer during the parking period.</li>
<li>The taxpayer may act as the contractor (and receive a fee) or supervise the making of the improvements.</li>
</ul>

<p>In a reverse build-to-suit/property improvement exchange, at some time during the parking transaction (but no later than 180 days) the old property gets sold and the net proceeds go into the taxpayer's&nbsp; exchange account.&nbsp; No later than 180 days from the inception of the parking transaction, the exchange funds are sent to the EAT as the nominal seller and the EAT uses these funds to repay the original bank and/or taxpayer loan.&nbsp;</p>

<p>The procedure is much the same for a forward build-to-suit/property improvement exchange where the exchange account has been funded prior to the parking transaction.&nbsp; In this case, although the funds may have been paid out to the EAT, the taxpayer still needs to complete the conventional exchange by acquiring the improved property from the EAT.</p>

<p>Whether it is a forward or reverse build-to-suit exchange, completing the transaction is the same.&nbsp; The taxpayer's rights under the contract to acquire the improved property from the EAT are assigned to the qualified intermediary, and the transfer to the improved property is accomplished by either assigning the membership interest in the EAT to the taxpayer or by the EAT issuing a deed to the taxpayer.</p>

<p>Customary agreements that would be used to document this type of exchange include:</p>

<ul>
<li>Qualified Exchange Accommodation Agreement (required under Revenue Procedure 2000-37)</li>
<li>Assignment by the taxpayer to the EAT of the purchase contract for the new property</li>
<li>Loan documents between the EAT as borrower and the lender</li>
<li>Master Lease if the property has a tenant or tenants</li>
<li>Sale Contract for the sale of the property from the EAT back to the taxpayer</li>
<li>Environmental Indemnity Agreement</li>
</ul>

<hr />
<p>&nbsp;</p>
<!--HubSpot Call-to-Action Code -->

<p style="text-align:center"><a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/07878ab4-b454-43a…; target="_blank"><img alt="Start Your 1031 Exchange with Accruit today" class="hs-cta-img" height="295" id="hs-cta-img-07878ab4-b454-43ab-90e0-95efb684dc56" src="https://no-cache.hubspot.com/cta/default/6205670/07878ab4-b454-43ab-90e…; style="border-width:0px;" width="801" /></a></p>