1031 exchange to build an ADU

[Haleh Olfati Johnson]

My husband is selling his rental townhouse and we are using that money to build an ADU on our property in order to rent it out. Since we would be using the money in the same manner could we use a 1031 exchange to defer the gain income tax ? Appreciate any suggestions

[Dave Foster]

@Haleh Olfati Johnson, 4 no votes unfortunately because you already own the lot and you can't exchange into improvements on a lot you own. It's a great idea though. And if in the future you were going to move and do the same thing you could possibly do a reverse exchange and have the 1031 intermediary take title to the house, sell your town home, and build and 1031 into the ADU before you take title and move into the main house. Then you would actually have two properties on one lot - the investment property and your primary residence.