By Michael Velasco | Exchangeable LLC
An improvement 1031 exchange allows you to defer capital gains taxes by reinvesting proceeds from the sale of an existing property into improvements on another property. However, if you already own the land where you intend to make improvements, it might complicate things a bit.
Typically, in a 1031 exchange, you’d sell a property and use the proceeds to acquire a like-kind property. The IRS has specific rules regarding what constitutes a like-kind property, and generally, land and real estate are considered like-kind. However, the improvements made on the land need to meet certain criteria to qualify for a 1031 exchange.
Here are a few points to consider:
- Value of the Improvements: The value of the improvements you’re making needs to be significant enough to qualify as a replacement property. If the improvements are relatively small compared to the overall value of the land, it might not meet the requirements for a like-kind exchange.
- Timing and Identification: You need to adhere to the strict timelines set by the IRS for identifying and acquiring replacement properties in a 1031 exchange. Make sure you properly identify the replacement property within 45 days of selling the relinquished property and complete the exchange/construction within 180 days.
- Tax Implications: Even if you’re improving the land that you already own, you can still defer capital gains taxes on the sale of the relinquished property by reinvesting in improvements. However, you’ll need to carefully navigate the tax implications and ensure that your exchange complies with IRS regulations to qualify for tax deferral.
- Consult Professionals: Given the complexity of 1031 exchanges, especially when dealing with improvements on already-owned land, it’s highly recommended to consult with a qualified tax advisor or real estate attorney who specializes in 1031 exchanges. They can provide guidance tailored to your specific situation and help ensure compliance with IRS regulations.
In summary, while it’s possible to do an improvement 1031 exchange on land you already own, it requires careful planning, adherence to IRS regulations, and professional guidance to ensure a successful and tax-deferred transaction.