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Improvement 1031 Exchange FAQ




Q1: What is improvement 1031 exchange?
 It is a tax-deferring exchange under Section 1031 of the US Internal Revenue Code that allows the taxpayer to use proceeds from the exchange to improve an existing replacement property or to build a new replacement property.  

Q2: Why is it so popular?
 This variation of 1031 exchange is of high significance since it enables the traders to purchase properties that require renovation. Alongside, it also provides the opportunity to take possession of a bare land and start the construction work as per the exact specifications. 

Q3: What is the role of a Qualified Intermediary (QI) in doing an improvement 1031 exchange?
 A QI, which is also often termed as the Exchange Accommodation Titleholder (EAT) works toward improving the replacement property during the exchange period. It then transfers the improved property to the investor at the end of the exchange period or when the exchange is completed; whichever occurs earlier. 

Q4: What are the important points to consider in order to complete the improve exchange of properties within the exchange period?
 To ensure that the improvement exchange completes successfully with 180 days of exchange period, it is essential to plan the things well in advance. Several obstructions such as getting government clearance, weather challenges, and delays in the construction, among others, should be kept in mind while planning the exchange. These may cause problems if not taken care of properly. 

Q5: How is an improvement 1031 exchange carried out?
 The taxpayers or investors usually do improvement exchanges in combination with a forward exchange or a reverse exchange structure. Seeking the help of an experienced and well rehearsed QI is recommended in these exchange transactions owing to their complicated nature and the involve ingrained technicalities. 

Q6: How does a forward 1031 exchange transaction take advantage of the improvement 1031 exchange?
  A forward 1031 exchange takes place in conjunction with an improvement 1031 exchange. It lets the exchanger to sell the relinquished property at first. Next, it helps in the identification and acquisition of the replacement property.  It also enables the taxpayers to make improvements to the replacement property, as per required in the 1031 exchange transaction deal. All the tasks related to the replacement property, such as its identification, suggested improvements, and the actual closing, etc., must strictly adhere to the prescribed 1031 exchange deadlines.  

Q7: How does a reverse 1031 exchange transaction take advantage of the improvement 1031 exchange definition n?
 The strategy involving the combination of reverse and improvement 1031 exchange is beneficial since it allows the taxpayer to acquire the replacement property at first. In addition, it also permits to make improvements to the replacement property thus acquired, during the time the attempts to sell the relinquished property are on.

Q8: What is the ideal time to complete the transaction in a reverse improvement 1031 exchange?
All the important property related activities are required to be carried out on or before the time of closing of the sale of relinquished property. As is obvious, all the related practices must be performed in accordance with the prescribed 1031 exchange deadlines. These include suggested improvements for the acquired replacement property, and transfer of the replacement property from the EAT to the taxpayer with all the improvement being made. 

Q9: What are different conditions that necessitate the need for improvement 1031 exchange rules?
 Certain circumstances could result in opting for 1031 improvement exchange. These include the failure of napkin test, instances where the exchanger builds a replacement property afresh, or when the replacement property needs improvements. 

Q10: What is a Napkin test?
 It involves the comparison of the value of the property to be acquired (or the replacement property) with the relinquished property. The test fails if the value of the replacement property comes out to be less than the relinquished property. 

Q11: How does improvement exchange helps during the failure of Napkin test?
 The improvement exchange could prevent the exchanger from paying taxes on the capital gains from the relinquished property in such a situation. It enables the exchanger to add capital improvements to a new replacement property, which he so far does not own. 

Q12: How is improvement 1031 exchange helpful in building a replacement property?
Ans: By enabling the exchanger to build his replacement property from the start, it helps the latter to appreciate his investment opportunities. It also emancipates the exchanger from catering to the terms and conditions of the market and seller. 

Q13: How can improvement 1031 exchange assist in the refurbishment of new property?
Ans: If a new investment passes the Napkin test, but needs renovation, the 1031 improvement exchange of properties is of much help in any such circumstance. It allows the exchanger to reuse the tax-free money to refurbish the new property. 


At Triple Net Investment Group we can assist you in locating a like-kind property for a 1031 exchange and ensure a smooth and successful transaction.

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