It's always good to plan everything before proceeding for the 1031 exchange. So, here in this blog, before discussing "build to suit" and "rehab to suit" exchanges, an investor or the taxpayer must have a brief knowledge of 1031 exchange. As the 1031 exchange has stringent deadlines, and there is no extension if the investor fails to complete 1031 within the specified time. However, many times, it takes more time to find a new property that's why everything must be planned before starting a 1031 exchange. 1031 exchange 1031 exchange from section 1031 of the IRC (Internal revenue code) is used for deferring the capital gain taxes. In this process, the taxpayer or the investor sells the property, hire an expert also known as qualified intermediary for the exchange, and reinvest the proceeds to buy a new replacement policy, and defer all the capital gain taxes. The taxpayer has a time period of 180 days from the sale of the property to complete the exchange. Qualified Intermediary is involved in the exchange process without whose presence the exchange cannot be completed because the proceeds received from the sale of the relinquished property is kept in an escrow account. If the investor uses or touches the cash, then he/she is disqualified from doing the 1031 exchange. "Build to Suit" and "Rehab to Suit" Exchanges The construction exchange or "build to suit" involves the procurement by the QI of empty land on which a structure will be fabricated . This outcomes in pretax dollars from the QI's appropriated funds being used (which can be enhanced by proceeds from new debt financing). Before the completion of the project or the termination of 180 days from the Income tax department (ITD), the part constructed and considered as realty qualifies as replacement property, provided that the "as built" structure is considerably the same (in terms of completion) as what had explicitly been timely recognized under the 45-day rule. The “rehab to suit” exchange is same because the QI acquires reality, which needs rehabilitation with pretax dollars being held by the QI. In either case, the relevant documentation should use "time is of the essence" language, as well as address the issue of liquidated damages for purposes of guaranteeing the fulfilment of the contractor's work before finishing the exchange in order to avoid the receipt of boot. Documentation should also require sequential deeding, in which the QI accepts legal title as an interim grantee during the development and rehabilitation period, eventually deeding the title to the exchangor before the expiration of the 180-day exchange replacement period.
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