Maximizing Tax Deferral with 1031

Improvement Exchanges

A 1031 improvement exchange offers savvy investors a unique opportunity to maximize the tax deferral benefits of a standard 1031 exchange while enhancing the value of their replacement property. Exchangers can significantly boost their investment potential by leveraging exchange funds to purchase replacement property and make improvements or new constructions within a designated timeframe.


In this article, we will explore the fundamentals of improvement exchanges, discuss their application in both forward and reverse exchange scenarios, and offer insights on key considerations when structuring an improvement exchange transaction.


What is a 1031 Improvement Exchange?

An improvement exchange allows investors to use proceeds from the sale of relinquished property not only to acquire replacement property but also to make improvements on the new property, all within the 180-day exchange window. This structure is outlined under the 1031 regulations and Revenue Procedure 2000-37, which provides a "safe harbor" for structuring improvement exchanges to ensure they comply with IRS guidelines.


How It Works

In a typical improvement exchange, the Exchanger sells their relinquished property and directs the Qualified Intermediary (QI) to hold the exchange proceeds. These funds are then used to acquire the replacement property and cover the costs of improvements or new construction that become part of the real estate. The QI or an affiliate of the QI forms a special purpose entity to acquire the replacement property from the seller, make the improvements and transfer the parked property to the Exchanger on or before the 180th day.


At the end of the exchange period, the improved property is transferred to the Exchanger, and the value of the improvements made during the exchange period is considered part of the replacement property for tax purposes. This process enables the Exchanger to maximize their tax deferral.


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Upcoming Webinars

1031 Exchanges Made Easy

Thursday, October 3, 2024

12:00 p.m. Eastern

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Join us for our "1031 Exchanges Made Easy" webinar, designed to provide you with a comprehensive yet straightforward overview of 1031 exchanges. We will also review the powerful benefits of 1031 exchanges. This session is perfect for real estate investors, business owners, their advisors and anyone interested in understanding the benefits and requirements of 1031 exchanges.

Mastering Reverse & Improvement 1031 Exchanges

Thursday, October 17, 2024

12:00 p.m. Eastern

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Discover strategies to overcome challenges of 1031 exchange situations by joining our comprehensive webinar on reverse and improvement 1031 exchanges. Designed for real estate investors and professionals, this session will provide knowledge and tools to successfully navigate complex exchange scenarios. Our experts will guide you through the intricacies of exchanges and demonstrate the solutions you need.

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Blog

The 1031 CORP. Exchanging Thoughts Blog

Check out Exchanging Thoughts, the 1031 CORP. blog, for more timely posts about 1031 exchanges and related topics.

KW Main Line Preferred Vendor Fair Ardmore, PA

1031 CORP. Exchange Team members, Ryan Gehlert and Katie Bromley, had a great time at the Keller Williams Main Line Vendor Fair! Thank you to everyone who stopped by to say hello!

PLTA 2024 Annual Convention

Pocono Mountains, PA

1031 CORP. Exchange Team members, Chad Isett and Katie Bromley, spent a few days at the Pennsylvania Land Title Association (PLTA) 2024 Annual Convention at the Kalahari Resorts & Conventions in Pocono Mountains, PA. We loved seeing the closing officers we work with every day!

Exchange Team Spotlight

Margo

McDonnell


President

& CEO


Collegeville, PA


(800) 828-1031

ext. 212


Email Margo


Connect on LinkedIn

Margo, you reached a milestone of 30 years facilitating 1031 exchanges with 1031 CORP. earlier this year. What part of your work brings you the most satisfaction?


I find immense satisfaction in helping others unlock the potential of 1031 exchanges. While many recognize it as a powerful tax-deferral strategy, fewer realize how it can support broader investment objectives. Whether it’s increasing cash flow, diversifying or consolidating assets, reducing management responsibilities, or planning for a future retirement home, a 1031 exchange offers numerous ways to build wealth and preserve equity. It allows investors to grow their real estate portfolio using pre-tax dollars. The more you understand the benefits of 1031 exchanges, the more you can leverage them to your advantage. My advice is to always consider your long-term real estate goals and explore how a 1031 exchange can help you get one step closer.


What tip would you give an investor contemplating their first 1031 exchange?


Remember that "like-kind" is incredibly flexible. Many investors mistakenly think that they can only exchange properties of the same type—like swapping a rental house for another rental house. In reality, any real property held for business or investment purposes can be exchanged for any other real property with the same purpose. You can exchange a retail building for farmland, an office space for an apartment complex, or even multiple properties at once. Properties can be located anywhere in the U.S., giving you a wide range of possibilities to fit your investment needs.


You helped the 1031 trade association, Federation of Exchange Accommodators (FEA), launch a certification and continuing education program in 2003. Why was this initiative so important to you?


The 1031 industry is largely unregulated, and it’s relatively easy for anyone to enter the field. Because of this, I felt it was critical to give investors, their agents, and advisors a reliable way to evaluate Qualified Intermediaries (QIs). That’s why I helped establish the Certified Exchange Specialist® (CES®) program. The 200 or so professionals who have earned this designation have demonstrated a deep understanding of Section 1031 through rigorous independent third-party testing. They are also bound by a Code of Ethics and required to complete 20 hours of continuing education every two years. At 1031 CORP., we're committed to ongoing education. Every member of our Exchange Team will complete at least 10 hours of continuing education by this year’s end to ensure we continue providing our clients the best service.

IRS Disaster Extensions are found at www.irs.gov/newsroom/tax-relief-in-disaster-situations. If you are an affected taxpayer, speak to a member of our 1031 CORP. Exchange Team about a possible extension.

Poll: Has the recent change in interest rates altered your plan for selling and acquiring new investment properties?

Please select only one answer. Poll results will be reported next month.
I'm waiting to sell due to rising rates affecting buyer financing and demand.
I'm selling now while rates are low to attract motivated buyers.
Lower interest rates mean more buyers, making it a good time to sell.
If rates rise too high, I may hold onto my property longer.
Interest rates aren't a concern; I'm focused on long-term gains and a potential 1031 exchange.
I'm selling now and plan to do a 1031 exchange before rates rise and financing becomes harder.

August Poll: How often do you rent out your vacation home each year?

Your poll answers from the August issue of Exchanging Times®.

About 1031 CORP.

Serving as a nationwide Qualified Intermediary for 1031 tax-deferred exchanges since 1991, 1031 CORP. strives to provide an exceptional exchange experience made easy for our clients and their advisors. We provide our clients with enhanced security of funds, knowledgeable exchange professionals and a commitment to keep the exchange process simple for our clients and their advisors. Our Exchange Team, which includes Certified Exchange Specialists®, has the experience and expertise to facilitate even the most complex exchange transactions, including reverse and improvement exchanges.

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