An approved structure can use funds for applicable work
An improvement exchange can apply exchange funds to applicable work before the taxpayer receives the replacement property. The structure needs early review.
Do not assume that work after property receipt will count in the exchange. Later production does not qualify as replacement property.
Title controls the sequence
For some improvement exchanges, an Exchange Accommodation Titleholder holds the property during construction. 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 path.
Prepare the work and cost facts
- The replacement-property purchase contract.
- The expected purchase date.
- The construction plans and specifications.
- The budget and payment schedule.
- The contractor and subcontractor agreements.
- The permit and inspection status.
- The lender and draw requirements.
- The insurance requirements.
- The work that can finish before property receipt.
- The active exchange deadlines.
Control each payment
The exchange structure must use an approved payment process. Each request can require contracts, invoices, draw records, and payment instructions.
The lender can require a separate inspection and draw process. The lender's process must agree with the exchange structure.
Review the identified property
The taxpayer can identify property that is not complete. The identification must describe the property and planned production in a clear manner.
The taxpayer must receive substantially the same property that the taxpayer identified. Substantial changes can cause a qualification problem.
Ask the tax advisor and attorney to review the description, expected value, incomplete work, and receipt date.
Frequently asked questions
Can the taxpayer pay contractors directly with exchange funds?
Do not use an unapproved payment path. Ask the exchange team to explain the permitted process before a payment occurs.
Can work continue after the taxpayer receives the property?
Yes, work can continue. However, later production does not qualify as replacement property for the completed exchange.
Must the budget equal the exchange funds?
The structure needs a complete funds plan. Ask the tax advisor to review value, debt, cash, costs, and possible recognized gain.
Can construction start before the EAT holds the property?
Request a review before work starts. The team and advisors must determine which work can fit the proposed structure.
Review the plan before work starts
Call 888-747-1031. Give the team the purchase date, title plan, budget, contractor, lender, and work schedule.
This page gives general information. It does not give tax, legal, construction, lending, insurance, investment, or financial advice.