An Improvement or Construction Exchange allows the exchanging person or entity to build on, or make capital improvements to the replacement property using exchange proceeds. An Improvement Exchange can occur in the context of a delayed or reverse exchange. This strategy allows a taxpayer to purchase replacement property needing renovation, or to acquire bare land, and build to their specific needs. An Exchange Accommodation Titleholder (EAT) makes improvements to the replacement property during the exchange period and then transfers the improved property back to the exchanger by the 180th day.
In the context of the delayed exchange, the exchanging taxpayer sells property using a Qualified Intermediary. Within 45 days of this sale, the replacement property is identified. The exchanging taxpayer subsequently enters into a sales contract and enters into a Qualified Exchange Accommodation Agreement (QEAA) with an EAT, typically an entity owned by the Qualified Intermediary. The exchanging taxpayer assigns the rights to purchase the property to the EAT who purchases the property using the relinquished property sale proceeds. Within 180 days, the EAT completes construction using additional sales proceeds or bank financing to pay for the improvements. While the EAT holds title to the replacement property, construction is typically managed by the exchanger. Upon completion, or at the end of 180 days, the EAT transfers the improved replacement property back to the exchanging party.
In a reverse Improvement Exchange, the EAT purchases the replacement property on behalf of the exchanging taxpayer prior to the sale of the relinquished property. Within 45 days of this purchase, the relinquished property that is going to be sold and exchanged is identified. The EAT completes construction of any improvements needed. Construction financing provided by the taxpayer or a financial institution will be loaned to the EAT using a non-recourse note and deed of trust. When the EAT transfers the property to the taxpayer, the taxpayer assumes liability for any financing.
Advance planning is critical to the success of an Improvement Exchange. Permit requirements, construction complexity, inclement weather and construction delays can make it a challenge to complete the needed improvements within the 180 day exchange period. 1031 Corporation, as a subsidiary of FirstBank, understands the complexity of Improvement Exchanges and has the expertise to deal with construction financing needs.