Can I use 1031 exchange on a new build house

Question

I’m selling a house this month that I owe nothing on and I would like to use that money to build a new house on some land that I own. Can I avoid paying capital gains tax some how?

Dave Foster · Answer

@Kyle Crouch, because you already own the land you cannot exchange for any subsequent improvements on that land.

You could exchange into a new build where a builder owns a lot and is building a house on it.  As long as you can take title to it within 180 days from when you close the sale of your old property.

Or you could do a Reverse Construction exchange where the QI takes title to the lot (before you do) and then the builder builds on it.  Again you only have 180 days from when the QI takes title to the lot to get your exchange done.

New construction is hard to make work with a 1031 unless you are purchasing a property from a builder that will be complete is a fairly short time.

Alvin Taveras · Answer

@Kyle Crouch

Yes, a lot of our clients are able to purchase using their 1031. The key is to Identify properties that are already under construction and you would close on the property once it's completed.

Doing ground-up construction, where you buy land find the builder, and get a construction loan would be very difficult due to the deadlines of the 1031.

Jeff Nash · Answer

For starters, is the property you are selling a property you have held for investment (not a fix and flip where you are a dealer)?  Is the replacement property intended to be used for investment too or for personal use?  More information js needed to see if a 1031 makes sense and would even work in the first place.   If it’s the taxable gain you are concerned about, you can temporarily defer that portion of the sale through 2026 by investing in a Qualified Opportunity Zone fund.  This works in certain situations as does a 1031.  It just depends on an investor’s goals and objectives.

Scott Johnson · Answer

Sounds like it's straight up not an exchange because he already owns the like kind property he's trying to build on. Makes sense. Can't exchange with yourself.

Kyle Crouch · Answer

@Dave Foster thank you for the information. Building in 6 months would be a tough job for me so I’ll just find another way to keep my money from the government.

Sean Ross · Answer

Amen, @Anna Catron.  The limitations around targeting your own property (or a relative's property) in 1031 exchanges are clumsy.  They're written to avoid basis switching and also reflect the IRS' general discomfort with non-arms-length dealings, but they end up limiting a lot of very valuable improvements.

It is technically possible to 1031x into land that you already own and improve it.  The structure is most commonly called a "ground leasehold improvement exchange" and it's the very deepest end of the 1031 pool.  In all our years doing this work, we've only seen it successfully completed a handful of times because of how many hurdles you have to jump over and through.

Anna Catron · Answer

Good afternoon!  Were you able to help @Kyle Crouch? I'd love help as well!

Anna Catron · Answer

Well, that stinks.  We wanted to do the same in Texas. I understand you can't exchange with yourself, but if the spirit of the law is to get us to build, why couldn't you put the profit into the actual construction even if you already own the land?

Would it be worth contacting a real estate tax attorney??

Jeff Nash · Answer

@Kyle Crouch I’d be happy to discuss with you as there are a number of different funds and they are of different types and geographically dispersed.

Kyle Crouch · Answer

@Jeff Nash thank you for the in depth information. How would I find these opportunity zones?

Can I use 1031 exchange on a new build house

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