If the replacement property in an exchange is land to be constructed upon (a build-to-suit exchange) or consists of land with a structure on it that needs further improvements (a property improvement exchange), it is possible for the improvement costs to be incurred prior to the exchange.
A build-to-suit or improvement exchange can take two different forms. When the taxpayer has sold property and funded the exchange account prior to the acquisition date of the new property, the exchange funds can cover the purchase price of the new property. This is a forward build-to-suit or property improvement exchange.
If the taxpayer wants to begin the improvements before the sale of the old property, a reverse build-to-suit or property improvement exchange is necessary, since the sequence of buying and selling is reverse from a normal exchange.
In this document, we outline the steps necessary in a forward and a reverse build-to-suit or property improvement exchange.