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Built-to-Suit Exchange

A Built-to-Suit Exchange, also known as an Improvement or Construction 1031 Exchange, is a specific type of tax-deferred exchange permitted under Section 1031 of the Internal Revenue Code. This exchange allows investors to use their tax-deferred exchange equity to improve or construct the replacement property while the exchange is occurring.

Here is how it works:

  1. The investor sells their original property and starts a 1031 exchange. This triggers two timelines: a 45-day identification period and a 180-day completion period.
  2. Instead of identifying an already-built replacement property, the investor identifies a parcel of land or a building that needs improvements.
  3. The funds are held by a Qualified Intermediary (QI), a necessary component for a valid 1031 exchange, which uses the funds from the original sale to purchase the replacement land/building on behalf of the investor.
  4. The QI also uses these funds to pay for construction or improvements on the replacement property. These improvements need to be completed and the property needs to be transferred back to the investor within the 180-day completion period.

The Built-to-Suit Exchange is a bit more complex than the standard 1031 exchange due to the involvement of construction/improvements and the need to finish them within the set timelines. But when executed correctly, it allows investors to essentially build or customize their replacement property while still deferring capital gains taxes, which can be a significant advantage. It is important to note that these transactions are complex and should be done with professional guidance, as there are many rules and regulations that must be followed.