1031 from raw land to rental?

Question

Can I use the 1031 exchange from a raw land purchase to a small condo and then rent out the condo/house?

My situation is that I've purchased some land on the coast and if I flip it can I take that gain and put it into a property I can now rent out even though it is not land? Thoughts? Thanks all!

Bill Exeter · Answer

Hi @William R. Matthews IV,

Yes, you can sell raw land and acquire any other type of real estate that is also held for rental, investment or business use.  There are really two issues to consider here.  The first is Qualified Use, which requires that the Relinquished Property and the Replacement Property are held for rental, investment of business use.  The second is like-kind, which literally means you are selling real estate and must buy real estate.

The critical component is your intent regarding the property.  I completely agree with @Dave Foster here and completely disagree with Account Closed.  If you are audited, it is all about your intent and whether you can prove that you had the intent to hold the property for rental, investment or business use.  The length of time can help you to prove your intent, but it not the determining factor.

Dave Foster · Answer

@William R. Matthews IV, Sorry but the above poster is absolutely wrong.  "Intent" and how you demonstrate that intent on both the property you are selling and the property you are purchasing is everything.  There is no statutory holding period.  The other poster is holding on to a mantra of the past that has been proven in courts many times to be a false mantra.

Most investors feel comfortable that a holding period of more than a year will satisfy to demonstrate your intent.  However there are always circumstances where a holding period of less than a year would be sufficient (or where a holding period of more than a year insufficient).  There are many court decisions both ways.  On of the most famous recently was the recent denial of 1031 treatment on a parcel of land sale that had been held for over 10 years.  It was denied because the owner had never demonstrated that he had changed his intent from primarily resale (he was a developer) to holding.

What you need to do is truly examine your intent.  Did you and your girlfriend buy this to hold for investment or because you wanted to sell it immediately.  Was the property actively for sale - then your intent was clearly to resell and the 1031 would not be appropriate.  However were you intending to hold and the offer was unsolicited?  Then your intent certainly could have been to hold and the 1031 could be appropriate.  All kinds of things including past actions, current practice, stated business model, correspondence with professionals can be used to demonstrate your intent.

Account Closed · Answer

If you do get a better offer, and you sell, and you have held the property for less than one year, your profit will be Capital Gains, and it will be short-term Capital Gains, and it will be taxed at whatever your marginal tax rate turns out to be for this year.  And you will not be subject to self-employment tax, assuming you are not in the business of buying and selling real property.

You're just a guy who bought and sold a piece of property within a year.

But if you decide to hold the property until you have held it for a year and a day, and you want to sell it at that time and do a Section 1031 Like Kind Exchange with a Condo as the Replacement Property, you can do that.

"Intent" is totally irrelevant.  It does not matter what was going on in your mind on the day of closing, or even the months afterwards, unless you were publishing your thoughts on your blog.  They certainly aren't of record anywhere else.

What matters is, when you sell, whether you held the property for a year and a day as investment property.  You weren't trying to sell it.  You didn't subdivide it.  You were just holding it.

The only intent requirement is that you must intend to use the Replacement Property, the Condo, as investment real estate, and then you must document this intent by actually doing so for a period of time that should be at least one year, with the income being reported on at least two annual tax returns.  At that point you will have satisfied all of the requirements of your Section 1031.

A Section 1031 requires planning, and understanding the rules.

I hope this helps.

Good Luck.

Michael Lantrip

Account Closed · Answer

Flip it?

When you ask questions you will get more valuable answers if you include some information about dates, prices, time periods, etc.

Yes, raw land can be used as the Relinquished Property in a Section 1031 Like Kind Exchange, and a condo can qualify as the Replacement Property.

But you haven't included enough information to determine if your particular situation will qualify.

William R. Matthews IV · Answer

Thanks Michael. Your answer is clear. I appreciate it. I purchased the lot with my girlfriend for a low price and maybe getting a better offer.

Drew Reynolds · Answer

@William R. Matthews IV - the short answer is yes.  The "Like-Kind" provision of a 1031 just means "investment property" for "investment property".  It does not need to be land for land.  The bigger question is to intent.  You use the term "flip"  - 1031 exchanges apply to properties which were held for the intent of investment, not flipping.  However, if you intent was to hold longer term, but got an offer to good to refuse, you may have a case.

1031 from raw land to rental?

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