Improving 1031 purchased property

[Susan Douma]

Several years ago my husband and I, 1031 exchanged into a home with several unimproved lots. It is zoned R-3. We would like to build multi family on these lots. What are the rules for improving on 1031 exchanged property?

[Dave Foster]

@Susan Douma, I don't think you've got any issues with building on those lots now as regards your 1031 years ago.  Changing the use of the property does not trigger a tax event.  And if you're building that multi to hold for productive use then that's fine too.

Where you may have an issue is if you want to build and immediately sell then you've changed that from investment real estate to inventory and your gain on the construction profit would be taxed at ordinary income levels.  If this is one of your options you can easily remedy it by building, holding, and then selling and doing another 1031.