Can I do 1031 after subdivision?

[Chunyan Song]

My partner and I own a rental SFH in Seattle area. We are going to do subdivision and split the lot into 2. I can do 1031 exchange at this point right? We are also entertaining the idea of tearing down the existing house, and building two houses on the split lots. If I tear down, build and sell, can I still do 1031 exchange when selling?

[Chunyan Song]

PS: at the time of subdivision, I would have owned the house for 2 years and it’s rented out the whole time.

[Dave Foster]

@Chunyan Song, This is an interesting question.  Most folks believe that performing legal partition only to change entitlements does not constitute the creation of new real estate.  It is simply matching up the real estate to it's best and highest potential use.  In that case to simply sell the property with new entitlements would still be an appropriate 1031 exchange opportunity.  Every accountant will have a different take so make sure yours in on board.

It's pretty clear that once you turn a shovel to change the property you are creating new real estate.  And when you do that  you create difficulties in the IRS verifying that your intent was to hold for productive use.  So if you were to split the lots legally and then build on the lots that would most definitely be creating new real estate with a new holding window to establish intent.

[Chunyan Song]

Thank you so much Dave! We are planning to rent it out for a bit after construction to establish intent. Hope it works out!