IMPROVEMENT EXCHANGE
In an improvement exchange, the owner typically wants to repair or renovate an existing building or construct a new building on vacant land on the replacement or relinquished property, with those improvements counting toward the exchange value.
Improvement Steps
1
Purchase and Sale Agreement
The Purchaser and Seller enter into a purchase and sale agreement (PSA) for the replacement property. The PSA is assigned to the EAT so the EAT can hold title to the replacement property until a purchaser for the relinquished property is found.
2
The Transfer
The Seller transfers the replacement property to the EAT.
3
Qualified Exchange Accommodation Agreement
Within five days of the transfer of the replacement property, the Purchaser and the EAT must enter into a Qualified Exchange Accommodation Agreement (QEAA), that states the following:
• the EAT is the beneficial owner of the replacement property on behalf of the Purchaser to complete a 1031 exchange under Rev. Proc. 2000-37;
• the parties will report the acquisition, holding, and sale of the replacement property as required under Rev. Proc. 2000-37; and
• the Purchaser and the EAT will treat the EAT as the beneficial owner of the property for federal income tax purposes.
4
Relinquished Property Transfer
Within 180 days of the transfer of the replacement property to the EAT, the Purchaser transfers the relinquished property to the Third-Party Purchaser.
5
Finalize Transaction
The EAT constructs improvements, repairs, or renovations during the exchange period and then transfers the replacement property to the Purchaser.
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