1031 exchange rental properties for land to be developed

4 Replies

Hi folks,

I am thinking about a strategy to sell my 3 triplex rental properties and then by a tract of land to develop.  I would like to do a 1031 exchange.  The land would be a large parcel that I would subdivide into house lots and sell them individually or build spec houses on them.  My question is how would I calculate the basis for each individual lot that is carved out of the original tract of land?

U will want to talk with your tax advisor/cpa  when you create lots and spec homes these become inventory and then your taxed at ordinary income.. so not sure doing a 1031 into the land other than short term help will help you in the long run..

Might be better to sell the houses pay the capital gain.. then buy the land..   tax would be cheaper than ordinary income

but again check with your people on this.

To funny I had that @$$$ backwards.. sell the land  pay cap gain then build sell spec houses and pay ordianry income on gain from those sales.

so if you lets say have 5 lots that you sell yourself for 250k  thats 50k per lot.. lets say your basis years ago is 100k thats a 150k gain at cap gain rates as long as your intent was to hold when you first bought them

now our cost is 50k plus the cost to build house is your new basis  and profit above is ordinary income.

I have personally done this with properties that i bought to land bank then decided to build on.. I sold to the building entity first to take cap gain and step up basis so that the profit from the sale of homes was not as great.

but again check with your people on the tax planning.. I am no expert and what i did may not work in your scenario

Hi @Brian Fournier

Properties acquired for the purpose of rehab/flipping or building/developing and then selling generally do not qualify for 1031 Exchange treatment as @Jay Hinrichs pointed out.  These properties are not considered held for investment but rather held for sale and will not qualify.  However, if you 1031 Exchange into the land and then build/develop and then hold for rental, investment or business use, they could qualify.  It all boils down to your intent.  

@Brian Fournier , as @Jay Hinrichs alludes to there are some ways to mitigate some of the gain in situations like that.  Land banking was a very popular strategy a while back.  It's not for the faint of heart and needs to be structured very carefully.  Whether or not you want to continue with the tax mitigation of a 1031 will be a proforma exercise with your professionals.

To your specific questions your accountant will calculate the basis on the land when you do the 1031.  They will probably use an acreage value and that is easy enough to track into the acreage allocation of each lot.