Advanced Build-to-Suit 1031 Exchange Strategies: Building On Property Already Owned by Investor

In an advanced build-to-suit 1031 exchange transaction, also known as an improvement or construction tax-deferred exchange, an Investor may be able to use part of his equity to construct improvements on property previously purchased by him.

Investors must acquire a new interest in real estate as their like-kind replacement property in order to qualify for tax-deferred exchange treatment. How do you acquire a real property interest that you already own and that already exists when you must acquire a new real property interest that you do not already own in order to qualify for tax-deferred exchange treatment?

The over-simplified answer is that you must create a new, separate real property interest that did not previously exist that the Investor can acquire as part of his tax-deferred exchange.

This is accomplished by leasing the real property under a 30 plus year lease to an Exchange Accommodation Titleholder ("EAT") controlled by the 1031 Exchange Qualified Intermediary. The 30 plus year lease to the EAT creates a new and separate real property interest that did not exist previously. Now the EAT can construct or improve the property, and the like-kind replacement property becomes the 30 plus year lease plus the improvements.

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already_owned_by_taxpayer.aspx