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Improvement Exchange
Also known as a "construction exchange," improvement exchanges can only occur tax free if the taxpayer trades across or up in equity and debt. If the taxpayer trades down, he or she will suffer from a cash or mortgage boot.
The replacement property is built-to-suit, improved or altered as outlined in the purchase contract, and/or escrow instructions. While real property improvements need not be completed within the exchange period, the value of any portion of the improvements not completed within this time frame will not qualify as replacement property. Delaying the transfer of the relinquished property, allowing for improvements to begin on the replacement property, may effectively extend the 180-day exchange period. Within a construction exchange, property or assets must be part of the standing structure if they are to be considered once the 180 day period has expired. In other words, a load of raw building material, on-site, will not qualify as improved real property.
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What is the Boot Test?