As discussed in a previous article, often investors will undergo a 1031 Exchange when switching from one property ownership to another. This means that the proceeds gained from the original property to buy the new property can become tax exempt. In most cases, you have to change over to a property of equal to or greater value than the one you currently have in order to undergo this kind of exchange. But what if you want to move into a property of lesser value? One option is to build improvements onto the new property.
As long as all of the money from the original property is used to improve the new one in a meaningful way, you can undergo a Build-to-Suit or Construction Exchange. You don’t get to pocket any of the money, but now the advantage here is that you have a much better investment in the new property than if you had simply purchased it without the exchange. At a later date that you might decide to sell the new property, you’ll probably be in a better position to do so having made the improvements from the exchange.