Posted by JHyre in Ohio on April 25, 2003 at 06:55:09:
I think that you are alluding to a “build to suit” arrangement, where some of the proceeds from the relinquished property are used to make capital improvements to the acquired property. Keep the remaining $275k with the Qualified Intermediary. The intermediary disburses the money (to vendors, not you!) as improvements are made - BUT those improvements need to be made within the 180 day window or the exchange could go “splat”. There are some creative ways to get around the 180 day window (notably, by entering into a 30+ year lease with an option to buy, and exercising that option once the improvements on the leasehold are complete), but they need to be structured from the get go.
I am not aware of any law that would let you keep the cash in a “reserve” account except as described above.
Situation: My Apartment complex sold for $1,375,000. $775,000 in “boot” equity gain.
IRS 1031 Exchange “upleg” property: Large (225 unit) Mobile Home Park. Purchase price: $3,400,000. Down Pymt: $500,000. Balance ($2,900,000) is assumed Bank mortgage.
Question: How do I PROPERLY structure a Maintenence, Improvement, and Reserves Account (MIR) with the remaining $275,000 (actually, it is approximately $250,000 after my portion of closing and assumption fees), in such a way that it will not be classified, by the IRS, as “taxable boot” to me, or “sale income” to the seller?
Even “seasoned” and RE experienced CPA’s I’ve inquired with all say, “Yep, I’ve “heard” of that being done!”, but none seem to know how to get the ball rolling.
Many thanks for your assistance.