Video: 1031 Exchange into Improvements on Related Party Property

Navigating a 1031 Exchange in a low-inventory market or when lending costs are high can be challenging, especially for Exchangers looking to reinvest solely into property improvements. This video explores how a 1031 Exchange can be structured when making improvements on related party property while complying with IRC §1031 requirements.

A critical aspect of this process is ensuring that the same Taxpayer owns both the Replacement Property and the ground lease while also transferring ownership of the Relinquished Property before the exchange begins. Since a long-term leasehold interest of 30 or more years is considered like-kind to a fee-simple interest, an Exchange Accommodation Titleholder (EAT) plays a vital role in holding the leasehold interest during the buildout and improvements. Ultimately, the Exchanger acquires the ground lease and tentative improvements from the accommodator.

The key takeaway is that a long-term leasehold interest of at least 30 years qualifies as like-kind to tentative improvements. If an Exchanger owns both the Relinquished and Replacement Properties, partnering with a 1031 Exchange expert like Accruit is essential to ensure the transaction is properly structured. In this video, we break down the process and key considerations to help Exchangers navigate this type of exchange successfully.