Recently skyrocketing real estate prices have caused taxpayers to intensify their efforts to utilize the tax deferral benefits of Internal Revenue Code §1031 to put their newly found tax‐free dollars of equity to work to accomplish a variety of business and investment objectives. Goals can range from tax benefits such as creating or increasing depreciation deductions by exchanging into more highly leveraged property to economic benefits such as taxfree diversification or consolidation of investment properties.
Of increasing interest is the use of tax‐deferred exchange dollars to build or improve property to suit the specific needs of the taxpayer rather than acquiring existing property that might not be as suitable. Although taxpayers have experimented with these so‐called “build‐to‐suit” exchanges since the Tax Court sanctioned the prototype transaction in its 1962 Baird v. Commissioner decision, subsequent statutory and administrative pronouncements have refined the technique and provided more certainty for structuring a variety of transactions.
This article examines the legislative, judicial, and administrative history of build‐to‐suit taxdeferred exchanges, and suggests ways to structure transactions in a variety of business and investment scenarios.
