Exchanges with construction requirements

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The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Exchanges with construction requirements

Large corporations often buy ground and build a new headquarters through an EAT (Exchange Accommodation Titleholder; most QIs also are EATs). The process is complicated, two years long, and funded by non-exchange funds. For the 180 day exchange, the purchase of grounds or a house to be redone may be done with exchange funds. However, the funds for building or renovating cannot come from exchange funds. Before the end of the 180 days an appraisal (no C of O needed) must confirm a value warranting release of the additional funds. Obviously, in jurisdictions that are slow to issue permits, this scenario is impossible..

Question 1:
I wish to contract w/ builder to build 4 duplexes on an avail property. Builder needs money up front to buy land and progress payments during build. How do I do this with funds in escrow from recent sale of home on 1031? The lot is $500,00 and the property sold is $1.2M.

Answer:

The answer is complicated – here are some guidelines:

    • You can sell your $1.2M property and buy the $500K lot in same title as the property sold
    • You have 180 days to have the property sufficiently built to appraise for $1.2M.
    • You do not need a C of O
    • You will need to fund the construction with funds outside of the exchange money
    • If you achieve the above, then the QI can release the remainder of your 1031 funds within the 180 days

 To succeed, you need plans, permits, etc. and you need to be all ready to go. The above most likely cannot be done in a jurisdiction that is slow to issue permits.

Question 2:
Sold home and made a profit $500k as a single person. Licensed realtor + full time employee and may want to invest in land (to build a property). Would like to see if there’s potential to save anything vs paying so much in Capital Gains taxes.

Answer:

    • If the home was your residence, you cannot do a 1031. Section 121 grants you a $250K individual capital gain exclusion, and therefore your tax would be on half your gain.
    • If you have already gone to settlement, you have blown any chance for a 1031 exchange, because there were no QI’s papers at settlement to take the funds for you to avoid receipt.
    • If the home was not your permanent residence, you can invest in land; however, your 1031 funds cannot be used for building on the lot, and your remaining 1031 funds cannot be released by the QI without an appraisal proving the new value – all of this has to happen within the 180 day 1031 exchange period.

About Marilee:

Role of Marilee Hill, Registered Representative (RR) Marilee Hill is a skilled and experienced real estate professional advising on 1031 exchanges and much more, with a depth of experience in real estate markets. Hill knows the sponsors and other stakeholders in 1031 exchange processes: their usual intents, the rules, the mistakes many make, etc. As such, she has easy access to the sponsors in the business of providing 1031 investment property to the broker/dealer community. Ask Marilee Hill about the process of 1031 exchanges, how to proceed – and how to succeed!

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1031 Exchange