If you are an investor, you may be aware of the section 1031 exchange rule, and how it can be used to defer the capital gains taxes on the sale of an investment property, into a replacement property of equal or greater value. But it isn’t possible to use the money from your exchange to pay the debt on an investment property that you already own – and likewise, you can’t build improvements on land that you own with a 1031 exchange.Commissioning updates on land that you already hold title to doesn’t qualify as “like-kind”, and can be problematic for uneducated investors.

Ideally, you would take the money that was collected during the exchange and build to suit on the new land yourself, i.e., you get the built structure you want and purchase a replacement-property that is worth the same amount (or greater value). So how does one accomplish this?

There is an option called “the poor man’s build to suit exchange” wherein the buyer requests that the seller make the desired improvements to the structure prior to the completion of the sale. For example, an investor (after selling her investment property) – wants to buy another property to replace it – for an equal or greater value.But the replacement property is only worth about k, which isn’t enough to qualify as a “like kind” exchange, and therefore not “transferable” under 1031.

In this case, the property investor would request that the seller raise the price of the property 0,000 – but before closing – construct ,000 worth of improvements to the investment property. Ultimately this investor spends the same amount (0k) to buy a property of the same value.

Finding a replacement property seller who is willing to increase the sales price, and make improvements before closing, may be difficult.  Another option in our investor’s case is to have the qualified intermediary (QI) buy the replacement property for ten thousand dollars, take title in a LLC wholly owned by the QI and use the remaining exchange monies to construct improvements to the property.

Put another way, your qualified intermediary will hold the property during it’s improvement process, funding them with the money from the exchange. The investor can complete the exchange by receiving the replacement property from the Qualified Intermediary when the improvements are completed.

Keep the following points to in mind about the 1031 Build to Suit exchange. 1st, the 180 day period that is allotted to you to complete your exchange, won’t give you adequate time for a complex build to suit.  But, this should be enough time to rehab and update an already standing building.

Secondarily, to be considered an actual “like kind” exchange, any of the improvements to the replacement property must constitute “real-estate”, i.e., real estate for real estate. Just dumping the building supplies on the location of your property won’t be enough, to constitute “real estate” those materials must be made a permanent part of the structure or affixed into the land.

Keep the foregoing in mind and you can avoid any pitfalls and get all of the tremendous tax benefits of a 1031 exchange that is build to suit.