1031 for Development on Vacant Land I Own?

Question

I purchased a single family home on .75 acres in the city of St Paul, MN. I have since split the lot in half, leaving plenty of space to develop a multi-family building, probably 8-12 units. I'm wondering if it is possible to 1031 exchange a different property of mine to fund construction efforts on my vacant land. Does anyone have advice on this matter? Thanks in advance, BP community!

Nik Moushon · Answer

You cannot 1031 anything back to yourself.

Wayne Brooks · Answer

Nope, you have Buy a replacement property.

Dave Foster · Answer

@Shahriar Khan, In theory it could  word for @Eric Gunderson but that qualified person would have to be unrelated and have a profit incentive to buy the property or else it would for sure end up being tagged as a step transaction if examined at all.

There was a process that was once used to use called a leasehold exchange where the  QI would "lease" the property from the client and later sell the lease and improvements back to the client.  There was actually a favorable private letter ruling to the effect.  Unfortunately the IRS started cracking down on such transactions.  Same would be said of selling to a friendly party and buying back.

Shahriar Khan · Answer

@Dave Foster could there be #4 option for @Eric Gunderson

#4) sell that lot to a qualified person (outside immediate family) and buy it back later with a 1031  funds ...

Just thinking out loud here :)

Eric Gunderson · Answer

@Dave Foster Thanks for the explanation. Sounds like there could be a way, with a lot of added steps and safeguards in place. Might be good to just use refi proceeds like you suggested.

Dave Foster · Answer

@Eric Gunderson, Yep - It's unanimous:)  You cannot exchange into improvements on property you already own.

You could refi the property instead of selling and use the proceeds to build.  Or

You could sell both the property and lot and do a 1031 for both into a completed project.  Or

You could sell the lot and do a reverse improvement exchange into another lot and sell the property and 1031 into the completed improvements (this is different from what you suggested because in a reverse exchange the QI takes title to the property to be built on - you can't have owned it already).

1031 for Development on Vacant Land I Own?

Most Popular Reply