Escrow of sale proceeds to fund new construction

[Peter Walther]

I own a SFR in my individual name used for rental purposes. I'd like to sell it and work with a QI to use the funds to construct a new SFR to be rental. Has anyone here done this before and if so, what was your experience. Is it possible for me to later occupy the property to claim the $250k tax exemption for proceeds from the salesale of a principal residence?

[Dave Foster]

@Peter Walther,There's two ways to make this happen.

1. Simply contract with a builder who has a lot to purchase their completed building when it's done.  Then within 180 days of that date you sell your old property and do a regular exchange to complete the purchase.

2. If you have to purchase the lot before having a builder build on it. then a reverse construction exchange is needed.  In this type of exchange we take title to the lot and while we as the QI for the 1031, own the lot the builder builds on it.  The problem with these are that they are expensive (several thousand more than scenario 1).  Financing can be an issue since you or your 1031 account or a portfolio lender have to provide the funds.  And there are time limits that can get you.  Because from the day we take title to the lot you only have 180 days for you to take title and complete your 1031 exchange.  It's hard to get construction done in that time.

[Peter Walther]

Quote from @Dave Foster:

@Peter Walther,There's two ways to make this happen.

1. Simply contract with a builder who has a lot to purchase their completed building when it's done.  Then within 180 days of that date you sell your old property and do a regular exchange to complete the purchase.

2. If you have to purchase the lot before having a builder build on it. then a reverse construction exchange is needed.  In this type of exchange we take title to the lot and while we as the QI for the 1031, own the lot the builder builds on it.  The problem with these are that they are expensive (several thousand more than scenario 1).  Financing can be an issue since you or your 1031 account or a portfolio lender have to provide the funds.  And there are time limits that can get you.  Because from the day we take title to the lot you only have 180 days for you to take title and complete your 1031 exchange.  It's hard to get construction done in that time.

 Thanks for the response Dave.  I already own the lot I want to build on, can it be conveyed to a QI now?  The construction costs will exceed the proceeds from the sale of the relinquished property so can the proceeds be used initially and then supplemented as needed?  Does the construction need to be completed and a CO issued before the proceeds can be used?

[Dave Foster]

@Peter WaltherIf you already own the lot then the only (and it's a real stretch) would be a lease hold exchange - The lot has to be transferred to a different 3rd party for at least 180 days and then to the QI and then maybe it works.  The rulings from the IRS are mixed.  And it's several times more expensive than a construction exchange - not for the faint of heart or the un-attornied up.

[Peter Walther]

Thanks, it sounds like the downside outweighs the upside.  I'd dislike the IRS calling it a sham conveyance.