Improve replacement property during the exchange
An improvement exchange can include work on replacement property before the taxpayer receives it. The structure needs early review.
The review must cover title, construction scope, cost, schedule, financing, insurance, and exchange deadlines. Start before the purchase closes or work starts.
Primary action: Request an improvement-exchange review. Secondary action: Prepare the property, budget, contract, lender, and schedule facts.
Why title is important
A taxpayer cannot add later work to the exchange after the taxpayer receives the replacement property. Later production does not qualify as like-kind property.
For some improvement exchanges, an Exchange Accommodation Titleholder holds the property during the work. The short name for this titleholder is EAT.
The taxpayer can receive the property after the applicable work and exchange steps. The tax and legal advisors must approve the title structure.
What the team must review
Improvement exchanges have connected transaction parts. A change in one part can affect the other parts.
Review these items before the structure is set:
- The purchase contract and expected closing date.
- The current title holder and proposed title path.
- The construction scope and approved plans.
- The contractor agreements and payment schedule.
- The construction budget and available exchange funds.
- The lender requirements and loan documents.
- The insurance coverage during the holding period.
- The permit status and local approval schedule.
- The expected completion state before the taxpayer receives the property.
- The identification and exchange deadlines.
Produced replacement property
Federal rules permit identification of replacement property that is not complete. The written identification must describe the property in a clear manner.
The taxpayer must receive substantially the same property that the taxpayer identified. Substantial changes can cause a qualification problem.
Work that occurs after the taxpayer receives the property does not qualify as replacement property. Ask the tax advisor how these rules apply.
A planning sequence
- Contact the exchange team before the purchase closes.
- Give the team the title, contract, budget, lender, and schedule facts.
- Define the work that can occur during the exchange period.
- Let the advisors approve the exchange and ownership structure.
- Confirm the contractor, insurance, escrow, and payment controls.
- Monitor the work, costs, title, and exchange deadlines.
- Complete the approved transfer before the applicable deadline.
Construction funds and payments
The structure must control each construction payment. The team needs approved contracts, invoices, draw requests, and payment instructions.
The lender can have separate draw and inspection requirements. The insurance carrier can also have separate requirements.
Frequently asked questions
Can I use exchange funds for improvements?
An approved improvement structure can use exchange funds for applicable work. The team must review title, timing, costs, and payment controls.
Can I complete the work after I receive the property?
Work after receipt does not become replacement property for the exchange. Ask your tax advisor to review the planned receipt date.
Must all construction finish before the exchange ends?
The taxpayer must receive substantially the same identified property within the applicable period. The advisor must review unfinished work and value.
Can the contractor start before the exchange structure exists?
Do not assume that early work will fit the exchange. Request a review before the purchase closes or construction starts.
Does Reverse Exchange Services, Inc. approve the tax result?
Reverse Exchange Services, Inc. can coordinate its transaction process. The taxpayer's tax advisor and attorney must approve the tax and legal treatment.
Review the structure before work starts
Call 888-747-1031. Give the team the purchase date, construction schedule, budget, title plan, and lender contact.
This page gives general information. It does not give tax, legal, construction, lending, or insurance advice.