The Katrina and Rita hurricanes are, without a doubt, two of the greatest natural tragedies to hit our country. I don't want to minimize the tragic suffering and the loss of life. The loss of property pales in comparison. However, it is fair to say the amount of rebuilding that will have to take place on the Gulf Coast will be on an historic scale. The rebuilding of this region will require a substantial infusion of capital from many sources. There are 1031 exchange provisions that allow astute investors to move much-needed capital into the region in a manner that will result in a great investment.

Our firm has a number of clients with offices in the Florida areas that were hit by last year's hurricanes. Now that we have had a year to observe the impact of the hurricanes on the real estate industry, there is one important general conclusion we can draw from our observations, at least as they relate to 1031 exchanges: when this hurricane season is over there will be tremendous real estate investment opportunities available all along the Gulf Coast. While each area of the Gulf Coast was impacted differently, they will all rebuild. And this rebuilding process will provide great opportunities for savvy investors.

Most of our Florida clients whose properties had been built in the last five to ten years suffered very little damage to their properties from the hurricanes. Recently built properties were typically constructed using newer, hurricane-resistant building methods. These methods tend to utilize poured concrete or concrete block construction. They are built on pilings that raise them above the flood surge, and their ground floor partitions are designed to easily collapse under the force of the surge so that the surge is not trapped against the foundation of the building. Roofs are anchored to the building itself. Windows and glass doors are constructed of heavy tempered glass.

Our clients' beautiful vacation homes, built with the construction methods described above, came through last year's hurricanes with little or no damage, while their neighbors' properties, built many years before using stick-frame construction, were heavily damaged or completely destroyed.

As I watch the news reports about the miles of beautiful beachfront properties along the Gulf that are now completely destroyed, I can't help but see the great opportunities for new investment in this area. I predict that within five to ten years, these areas will have been rebuilt into new communities more beautiful than anyone could have imagined a few months ago. And rebuilding buildings and homes using modern, hurricane-resistant construction methods will give property owners much less to worry about in future hurricanes.

So, what does any of this have to do with a 1031 exchange? Astute investors can roll the gain from their Old Property into a New Property built along the Gulf using an exchange technique called a construction exchange, or in some cases, a reverse construction exchange.

A construction exchange happens when you sell your Old Property and use a portion of the proceeds to purchase a piece of bare land and then use the balance of the proceeds to build a new building on the property. The rule for construction exchanges is rather simple: the construction of the new building does not have to be completed within the 180-day deadline for a 1031 exchange, but you have to equalize your exchange by that date. For example, if you sold your Old Property for $500,000 and you want to buy a piece of bare land for $300,000 and build a million-dollar building on it, you do not have to complete the building before the deadline, but you have to spend the remaining $200,000 necessary to equalize your exchange at $500,000 by the 180th day.

The tricky part of a construction exchange is that if you take title to the bare land your exchange is over, at least on that property. In order to complete a construction exchange, therefore, you need to have your intermediary take title to the land for you and make the improvements necessary to equalize your exchange. For this reason you need to make sure that you are working with a topnotch intermediary. And make sure the intermediary knows in advance that this is what you are planning -- very few intermediaries handle this type of exchange.

Since the intermediary is going to take title to the property anyway, you might also consider a reverse construction exchange. In this type of exchange, the intermediary takes title to the bare land and starts construction before you've closed the sale of your Old Property. Financing of construction exchanges can get tricky, but a good intermediary can put you in touch with a lender who is experienced and comfortable with this type of program.

Published: October 27, 2005

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Gary Gorman is a retired CPA who has taught national tax classes for both Arthur Andersen & Co. and for Price Waterhouse & Co. and numerous undergraduate tax classes at Oregon State University. Since 1994 he has educated realtors, investors, CPAs and attorneys throughout the United States and Mexico on the intricacies of 1031 Exchanges. As the author of the best selling 1031 book Exchanging Up! and a co-author with Rich Dad/Poor Dad and Donald Trump, Gary is considered one of the Nation's leading 1031 Experts. Gary is the owner and managing partner of the national firm, 1031 Exchange Experts, LLC, which headquarters is located in Denver, Colorado, and offices in Arizona, Connecticut, Florida, Hawaii, and Texas. His firm is commited to securely holding client funds in separate, segregated accounts which clients can monitor through our affiliate banks' website. As a Qualified Intermediary, Gary has been involved in more than 30,000 1031 Exchange transactions since 1994. Contact him at , visit his website at expert1031.com, or call 866-694-0204.