Where Form 4797 Exchanges 2024-2025

Welcome to 10:31 University. I'm Paul Holloway. Today's topic is: Is it possible to make improvements on a replacement property that you have purchased? For example, if you buy a property of lesser value than what you sold, can you use exchange dollars to improve that replacement property? Well, it really depends. Let's go over a couple of situations where it does work, and then where it may not work. So, let's assume that you sell a property for a million dollars. That is the start of the 1031 exchange, also known as the relinquished property. The proceeds from the sale come to your qualified intermediary. Now, you've identified a replacement property valued at $600,000. Where it depends is if you actually take title to that replacement property at $600,000. That is your like-kind property, and you cannot use additional exchange dollars to improve a property that you already own. However, with a parking arrangement, much like a reverse 1031 exchange, if you have this replacement property parked with the qualified intermediary and they hold it under a special-purpose LLC as an exchange accommodating titleholder, you can use additional exchange dollars within the allotted 180-day window to make capital improvements to the property. These improvements have to be real property improvements and must be completed within 180 days. Now, let's move forward with this example. Instead of you buying the replacement property at $600,000, the qualified intermediary steps in and forms a special-purpose LLC. They buy the property at $600,000 and work with you on multiple draw requests until all the work is completed. The goal is to reach the $1,000,000 threshold by day 180 of the exchange. Assuming you are able to complete $400,000 of capital improvements, the property is now valued at $1,000,000, matching the sale price of your original...