Improvement Exchanges

Improvement Exchanges

An improvement, construction or build-to-suit exchange occurs when the exchanger wishes to use exchange proceeds to make capital improvements to the replacement property. However, improvements made to land already owned by the exchanger will not qualify as like-kind replacement property. Additionally, exchange proceeds cannot be used to pre-pay for improvements to be made after the exchange. Because of these rules, exchangers are required to use an accommodation parking structure, as used in reverse exchanges, whereby an EAT acquires the replacement property and holds title while the improvements are made.

The improvement exchange can occur in the context of a delayed or reverse exchange. In the context of delayed exchange, the exchanger sells the relinquished property using a QI. The exchanger has 45 days after the closing to identify the replacement property and the improvements to be made. The identification requirement is satisfied if a legal description for the underlying land and as many details as practical are provided regarding the construction of improvements when the identification is made. The exchanger enters into a purchase and sale agreement to acquire the replacement property and a QEAA with an EAT. The EAT agrees to acquire title to the replacement property and park title while the improvements are being made. The EAT uses the exchange proceeds to acquire the replacement property and pay for identified improvements. Within 180 calendar days after the sale of the relinquished property or the exchanger’s tax filing date, whichever is earlier, the exchanger must acquire the newly improved replacement property. The exchanger must receive property that is substantially the same as the improvements and property identified. Additionally, only proceeds spent on improvements that are substantially complete within the exchange period will qualify for non-recognition.