can I keep 1031 intact with this structure

Question

Hello, I am looking to buy a tear down or some land with my 1031. I would like to build 2-4 units on the land and keep 1 as a rental. would this keep my 1031 intact? Thanks in advance.

Bill Exeter · Answer

Hi Jason,

If you intend to build 2 to 4 units on the land, would you sell the rest and retain one (1) as a rental?  If so, it sounds like your primary intent is to buy, build and sell, which technically does not qualify for 1031 Exchange treatment.  The key is your intent to acquire and hold for rental/investment purposes (as opposed to held for sale like in building/developing) in order to qualify for 1031 Exchange treatment.

If you decide to build and hold for rental/investment, you can structure an Improvement 1031 Exchange, also referred to as a construction or build-to-suit exchange.  These are more complicated and the fees are much more than a standard Forward 1031 Exchange transaction, and some Qualified Intermediaries do not administer them.

Bill Exeter · Answer

Hi Jason, I just realized that I did not answer you last question.  Yes, you are correct, you could buy a tenant-in-common interest with another investor.  Your 1031 Exchange would qualify if you had the intent to hold your tenant-in-common interest (percentage) in the property regardless of what your partner does.  Your partner could sell his/her interest after you have completed your improvements and it would not hurt your buy and hold intent.

You are most welcome.

Dave Foster · Answer

That could work for you.  As Tennants in Common each of you own in reality a piece of real estate that is a specific % of a larger piece.  You may treat your % as you  want and your partner may do as they wish.  You can combine and do one exchange forward.  Or each of you could do your own exchange or none at all.  TIC is the ownership structure that provides the greatest flexibility in a 1031 situation.

You could also think of creating a separate entity for yourself to use for flips and one for holds that you want to use for 1031s.  That way you can create a more clear distinction between your dealer activity and your investor activity.  Take title to a % of the property as your flip entity and a % as your holding entity.

However your valuations still have to line up.  to complete the 1031 you have to purchase at least as much as you sold.  So if you sold your old property for 100K and the new property can be bought for 200K then you could take title to 50% of that property as Tennant in Common and complete your exchange.

Dave Foster · Answer

yep. Just watch your relinquished valuation and amount of recapture taken. An improvement exchange well done will be more expensive than a regular straight so that is the way you want to go if you can

Jason Carter · Answer

Thank you for confirming the above. The property that I am looking at has a home on it that is valued at 120k and the land is 170k. So I think I would be OK on the depreciation recapture aspect if I were to teardown and rebuild 2 units to hold. I will verify with CPA and attorney.

Thanks again Bill!

Bill Exeter · Answer

@Jason Carter

I'm not quite clear on your question, so I'm going to take a stab at it, but let me know if I do not answer your question.

If the purchase price of the land is equal to or greater than the value of your relinquished property, then your capital gain would be deferred without the need to complete an Improvement 1031 Exchange.

However, if you are selling improved property (i.e., property that has improvements/structures on it that are depreciable) and buying land that has no improvements/structures on it, you would likely have depreciation recapture since you are selling a depreciable asset and buying a non-depreciable asset.  You should be able to address this issue if the improvements are completed later but within the same tax year. Consult with your tax advisor to ensure that you do not unintentionally trigger depreciation recapture.

Jason Carter · Answer

@Bill Exeter  and @Dave Foster

I had a question about the improvement exchange you mentioned earlier. I spoke with a local QI and he said I would be able to do this without an improvement exchange. He said I would need to do an improvement exchange if for example, I have 100k from the relinquished property and I am buying house/land for 50k and needed to improve the land to get to the value of the relinquished property. So if this information is incorrect and I buy a house/land (at 295k with 100k from relinquished) that needed repair or an addition/tear down, I would need to do an improvement exchange?

Jason Carter · Answer

This is great news! Thank You Bill. Thank You Dave

Jason Carter · Answer

Thanks for the reply Bill. I thought about the construction exchange but it was cost prohibitive. I figured if I kept one as rental income It would still qualify. I'll have to talk to my CPA and RE Attorney. I also thought of partnering and splitting the cost of the lot. I found this on some 1031 website.

"Exchangers who intend to acquire less than a 100% ownership interest in thereplacement property should specify the specific percentage interest".

So if I partnered on a deal I could specify that I will be purchasing half of the property to keep as a rental and my partner should be able to sell the other half?

I would also like to thank you for all the posts and info you share with the BP community

can I keep 1031 intact with this structure

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