1031 Exchange for Barndominium

[Braeden Hilbish]

Hello! We are selling a home and going to net around 100k. We have been gifted a property that we would like to build a barndominium on. Is it possible to 1031 it into the build? Is it even worth it? If yes, I would appreciate any recommendations. Thank you!

[Dave Foster]

@Braeden Hilbish, there are a few issues with this scenario, and I'll explain why.

1. Since the property is your primary residence, it would not qualify for 1031 exchange treatment; the 1031 exchange is only for the sale and purchase of investment real estate.

2. If it were investment real estate, you can't do a 1031 exchange or make improvements on property you already own. If it were a builder that owned the lot, you could do what we call a reverse construction exchange, where your QI creates an EAT (Exchange Accommodating Title Holder) to take title to the lot until the construction is finished, and then transfer the title back to you. The exception to this is a very little-used process called a leasehold exchange, which seems to fall out of favor more and more with the IRS as years progress since the first private letter ruling was issued back in 2002, I believe. But involves a lot of "0s" and attorneys to accomplish anyway.

One of the time frame requirements is that you have a total of 180 days to complete your exchange and take title to the new property. So you have to make sure the construction is complete within that 180 days and that you don't get any significant delays. Because of this, Reverse construction exchanges can be a bit more complicated, but there are lots of scenarios where reverse construction exchanges make sense for investors and are successful with the right proactive approach.