1031 Exchange question

Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes

here goes.. I am a builder... I am in the process of building a 4 plex.. and then after that I will do another .. Plan on having 4 within the next 5 years. All being 75% LTV. If all goes well I am considering in 5 years selling these off and using the proceeds along with some other $ to build an apartment probably around 30 units or so. My question lies in the process of the 1031 exchange.
I know I have to have 1031 qualified intermediary handle it and I have a 180 day to have the process complete, but I am wondering if there is anything I have to do to make this work since in reality I would be the owner from the ground up. It isnt like finding an existing 30 unit complex that someone else owns.

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Bill ExeterBusiness Member

1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes

13y

You are referring to a Build-To-Suit 1031 Exchange (also called an Improvement Exchange or Construction Exchange). Starting with the closing of your sale transaction (relinquished property) you have exactly 45 calendar days to identify what you are going to buy (replacement property) and then you have an additional 135 days to complete the acquisition and build-out for a total of 180 calendar days.

The identification process can be a little tricky when you are doing a Build-To-Suit 1031 Exhange. You have to properly identify the land that you are buying plus the intended improvements to be made.

You also must make sure that you have the intent to complete and then HOLD each property for rental or investment. This means that you must build and then rent for at least 12 months (24 months would be more conservative) in order to demonstrate that you had the intent to hold for investment. If you build and then immediately sell (flip), you are actually holding for sale (not investment) and will technically not qualify for 1031 Exchange treatment.

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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
I think you might be talking about a construction exchange?? There are many variations of exchanges but 1031 is the most well known.

Ricky Novack at sea1031 likes to talk about exchanges. He has seen the vanilla stuff and all the weird stuff in between. I am not a 1031 expert.

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Aaron Junck
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Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes
13y
Cool thanks
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Aaron Junck,

You would need to complete the property in 180 days which seems quite unlikely to happen.

Here is a link that describes a construction exchange:
http://www.1031x.com/1031-construction-exchange.cfm

I am not affiliated with the above, I just posted it for information.

-Steven
[email protected]224-381-2660
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Sandy Blanton
Residential Real Estate Broker · Pensacola, FL · Member since 2012 · 221 posts · 49 votes
13y
Aaron Junck In our market, all 4 plex sales are foreclosures. They sell for dismally low numbers, $100K to $200K. I would guess the market values are 1/2 of the cost of construction.

Be sure your market doesn't have this horrible "multi family property disease." Check to see what they're selling for before you build. New construction isn't going to add much value to these properties vs. old, I think that's the case nationwide.

IMO. Good luck.

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Andrew Gustafson
Escrow Officer · Destin, FL · Member since 2011 · 8 posts · 2 votes
13y
Hold each 4 plex as an investment which means rent it out for one to two years. Your challenge will be to sell each 4 plex within a short period of time to exchange each into one 30 door apartment. Once the first 4 plex closes the 180 calendar day clock starts. Best case is to sell each with adequate time to identify and close on the 30 door unit.
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
13y
You are referring to a Build-To-Suit 1031 Exchange (also called an Improvement Exchange or Construction Exchange). Starting with the closing of your sale transaction (relinquished property) you have exactly 45 calendar days to identify what you are going to buy (replacement property) and then you have an additional 135 days to complete the acquisition and build-out for a total of 180 calendar days.

The identification process can be a little tricky when you are doing a Build-To-Suit 1031 Exhange. You have to properly identify the land that you are buying plus the intended improvements to be made.

You also must make sure that you have the intent to complete and then HOLD each property for rental or investment. This means that you must build and then rent for at least 12 months (24 months would be more conservative) in order to demonstrate that you had the intent to hold for investment. If you build and then immediately sell (flip), you are actually holding for sale (not investment) and will technically not qualify for 1031 Exchange treatment.
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