Section 1031 Construction Exchanges
A Section 1031 construction exchange is the right choice when you want to use your exchange proceeds not only to purchase a replacement property, but also to fund improvements or construction on that property.
Why a Construction Exchange Makes Sense
- You want to use exchange proceeds for both purchase and improvements on a replacement property
- IRS rules prohibit using exchange proceeds directly for labor and materials
- Temporarily vesting title in a holding entity solves that problem legally
How the Construction Exchange Process Works
To initiate a construction exchange, an Exchange Accommodation Titleholder (EAT) must be appointed to hold title while construction is completed. Required documentation includes:
- Qualified Exchange Accommodation Agreement, outlining the client's rights and obligations
- Assignment of Rights and Notification for the replacement property
- Construction Exchange Waiver and Release, outlining deadlines and client obligations
At closing, the EAT purchases the property using exchange proceeds loaned by Rattikin Exchange. The balance of the exchange proceeds are held in escrow and disbursed in periodic draws to the contractor as construction progresses. Once construction is complete, the EAT deeds the improved property to you by Special Warranty Deed, completing the exchange.
If the purchase price and construction costs exceed the available exchange proceeds, you will need to arrange financing through a third party lender.
Ready to Start Your Construction Exchange?
Construction exchanges require precise planning and careful execution. Contact our team today and we'll walk you through every step.
