SECTION 1031 CONSTRUCTION EXCHANGES

Many clients use a 1031 Exchange to apply a portion of the proceeds from the sale of their relinquished property towards the future purchase of a replacement property and then use the rest of the proceeds for construction of certain improvements to that property.

The IRS has strict regulations on a taxpayer's ability to use exchange proceeds towards construction costs on replacement property. Exchange proceeds may only be used to purchase real estate - not labor and materials. To resolve this dilemma, title to the property must be temporarily vested in the name of an Exchange Accommodation Titleholder (EAT) until construction is complete.

The Construction Exchange Process
To facilitate construction exchanges in which Alliant National Exchange is involved, we have formed a separate holding entity, Alliant Reverse Exchange Holding Company, L.L.C., to act as EAT and hold title pending the completion of construction on the replacement property.

In order to initiate a construction exchange, you must first appoint an EAT, such as Alliant Reverse, and complete several documents required for the exchange, including the following:

• Qualified Exchange Accommodation Agreement Outlines the client's rights and obligations and the nature of the exchange.
• Assignment of Rights and Notification - Replacement Property Assigns the purchaser's interest in the contract to the EAT and entitles the EAT to purchase property and obtain the title, pending the completion of improvements.
• Construction Exchange Waiver and Release Outlines the time deadlines and client obligations in the construction

Step 1.
At closing, Alliant Reverse will purchase the property with exchange proceeds loaned to Texas Reverse by Alliant National Exchange.

Step 2.
Alliant Reverse will hold the balance of the exchange proceeds in Alliant Reverse's escrow account pending completion of improvements to the property. Necessary withdraws will be made for payments to the contractor.

Step 3.
Upon the completion of the construction, Alliant Reverse will deed the improved property to the client by Special Warranty Deed - completing the exchange.

Please Note:
In the event the property purchase and the construction cost will exceed the balance of the exchange proceeds, the client will need to arrange for financing through a third party lender. The EAT will pay off any purchase money loans used to purchase the replacement property and immediately convey the replacement property to the client by Special Warranty Deed to complete the exchange.

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