Real Estate Investment Articles

An improvement exchange allows you to buy a fixer-upper with part of the exchange proceeds from the sale of the old property and then use the rest of the exchange proceeds to make improvements. In an improvement exchange, when you identify the property on the 45-day list, they must specifically say what improvements they're going to make and how much they will cost. As in reverse exchanges, an LLC we set up for you will take title to the property while those improvements are being done. We cannot transfer the property to you until all of the improvements are completed. The work must be completed within the 180-day period, and you must identify sufficient improvements to use up all the exchange proceeds.

In a construction exchange, you want to buy bare land with exchange money from the sale of the old property and build a new building on the replacement land. Our LLC must buy the land and begin construction, but unlike an improvement exchange, you can ultimately close out the exchange without the requirement that the building be completed. You still must complete the exchange before the 180 days are up. It's important to note, however, that you cannot take title to the land in your own name at the beginning, or the exchange will be invalid. Why? Because you would then be attempting to use part of the exchange proceeds just for the land, and the remainder just for the improvements, not for a completed, improved property. Mere improvements are not "like-kind" to improved property.

What if you can't get enough new construction completed within 180 days of the sale to equalize and finalize the exchange? In this case, you could do a reverse construction exchange. Here, our LLC takes title to the land with money borrowed from you before the old property sells. Then construction on the new property can begin and be well underway so that the construction is almost done when the sale of the old property closes. Under the new regulations, however, in order to take advantage of the reverse exchange safe harbor, the entire transaction must still be completed within 180 days of the closing on the purchase of the land. Extending the exchange beyond 180 days takes you outside the safe harbor provided by Rev. Proc. 2000-37.