1031 Exchange - Seattle, Shoreline, Mountlake Terrace, Lynnwood

1031 Exchanges
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1031 Exchange - Seattle, Shoreline, Mountlake Terrace, Lynnwood

Sherief Elbassuoni
Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes

The Lynnwood Link light rail is getting built right now and it will go through the Cities of Shoreline, Mountlake Terrace, and Lynnwood. You can see the map in here https://www.soundtransit.org/system-expansion/lynnwood-link-extension

These three cities are going through a lot of up-zoning changes. Sometimes, what used to be a single-family house zone, is now a multi-family or apartment buildings zone.

I am currently working with a partner who has a property he would like to sell.

With the money he gets out of selling his property, we would like to buy a house (a lot can also work out) in one of these three cities (Shoreline, Mountlake Terrace, Lynnwood), tear it down, then build either multi-family townhouses or an apartment building.

Anyone in here is familiar with these up-zoning changes, and how to go through the 1031 exchange?

Thanks in advance for your help!

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y

@Sherief Elbassuoni

The 1031 will be a problem, with the 180 days to complete. 

@Dave Foster ??

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  • Adrian Chu
    Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes
    7y

    Yeah there are upzones planned. But there are lots of nuances in the zoning code you need to look into. For example, Shoreline has an affordable housing component, as well as various setback requirements, and other development standards to follow.  Not all upzoned lots are created equal - you will need to perform due diligence on each one.

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    @Sherief Elbassuoni

    The 1031 will be a problem, with the 180 days to complete. 

    @Dave Foster ??

    1Reply
  • Nik Moushon
    Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
    7y
    Originally posted by @Wayne Brooks:

    @Sherief Elbassuoni

    The 1031 will be a problem, with the 180 days to complete. 

    @Dave Foster ??

     This was my understanding for a 1031 to build new construction. You wont even have architecture drawings and permits ready in that time frame for a MF building let alone having in constructed. 

    1Reply
  • Michael Skoczylas
    Attorney · Southfield, MI · Member since 2016 · 102 posts · 83 votes
    7y

    Depending on the agreement between the purchase of the lot and the soft costs associated with Architecture and building the tenant in common doing the 1031 may be able to use the exchange proceeds within the 180 days. However, if there are significant exchange proceeds that cannot be spent in the 180 days (and one cannot just buy materials, the materials must be affixed to the property by day 180) there may be a problem. But if the plans can all be done prior to purchase and be shovel ready at the day of purchase you may be able to spend proceeds within the 180 days. 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Wayne Brooks @Nik Moushon,  yep the 180 day timeline can be an issue with a safe harbor reverse under rev proc 2000-37.  The option still exists to go outside the safe harbor.  But folks doing that these days generally are pretty lawyered up in case...

    About the only mitigation you can build is some cooperative efforts with the seller to purchase contingent upon receipt of entitlements.  That can buy some advance time on the start of the clock.  Other than that it is a 6 month race to get as much done as possible

    Another option might be to have a back up purchase on the 45 day list that could be used to absorb the excess of the sale.

    The 1031 Investor5140 Reviews
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    1Reply
  • Mark Turok
    1031 Exchange Qualified Intermediary · Member since 2019 · 3 posts · 0 votes
    7y

    I’ll think through this one @Sherief Elbassuoni. 

    0Reply
  • Nik Moushon
    Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
    7y
    Originally posted by @Dave Foster:

    Another option might be to have a back up purchase on the 45 day list that could be used to absorb the excess of the sale.

     So side question....This statement here make it sound like you dont have to complete construction you just have to spend the money that is allocated through the 1031? So if I had $1m in a 1031 but could only spend $800k before the 6 month window I could have had a second property as a backup purchase to spend the remainder $200k? 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Nik Moushon exactly correct.  You could take the remaining 200 as boot or use it on a back up property that was on your list.

    That’s a long time for a property to stay on the market. But a pocket listing or a large dst or a property owned by a friend might all work

    The 1031 Investor5140 Reviews
    WebsiteView Page
    1Reply
  • Sherief Elbassuoni
    OP
    Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
    7y
    Originally posted by @Adrian Chu:

    Yeah there are upzones planned. But there are lots of nuances in the zoning code you need to look into. For example, Shoreline has an affordable housing component, as well as various setback requirements, and other development standards to follow.  Not all upzoned lots are created equal - you will need to perform due diligence on each one.

    @Adrian Chu, that is right, there are lots of zoning info on the Citys websited but they are not organized and sometimes not conclusive (it is not clear if they already changed the zone for a specific area, or they already changed the zoning). I will keep working on that

    2Reply
  • Sherief Elbassuoni
    OP
    Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
    7y
    Originally posted by @Wayne Brooks:

    @Sherief Elbassuoni

    The 1031 will be a problem, with the 180 days to complete. 

    @Dave Foster ??

    Correct Wayne, 180 days is pretty short. These cities are just booming now because of the rail and I am trying to find a solution to how to build something there

    2Reply
  • Sherief Elbassuoni
    OP
    Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
    7y
    Originally posted by @Michael Skoczylas:

    Depending on the agreement between the purchase of the lot and the soft costs associated with Architecture and building the tenant in common doing the 1031 may be able to use the exchange proceeds within the 180 days. However, if there are significant exchange proceeds that cannot be spent in the 180 days (and one cannot just buy materials, the materials must be affixed to the property by day 180) there may be a problem. But if the plans can all be done prior to purchase and be shovel ready at the day of purchase you may be able to spend proceeds within the 180 days. 

    I like these ideas, Michael, for sure we will consider them!

    2Reply
  • Sherief Elbassuoni
    OP
    Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
    7y
    Originally posted by @Dave Foster:

    @Wayne Brooks @Nik Moushon,  yep the 180 day timeline can be an issue with a safe harbor reverse under rev proc 2000-37.  The option still exists to go outside the safe harbor.  But folks doing that these days generally are pretty lawyered up in case...

    About the only mitigation you can build is some cooperative efforts with the seller to purchase contingent upon receipt of entitlements.  That can buy some advance time on the start of the clock.  Other than that it is a 6 month race to get as much done as possible

    Another option might be to have a back up purchase on the 45 day list that could be used to absorb the excess of the sale.

    Dave, great ideas. I did not know that you can do that. Thanks for sharing

    3Reply
  • Nik Moushon
    Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
    7y
    Originally posted by @Dave Foster:

    @Nik Moushon exactly correct.  You could take the remaining 200 as boot or use it on a back up property that was on your list.

    That’s a long time for a property to stay on the market. But a pocket listing or a large dst or a property owned by a friend might all work

     Oh wow. I had always thought construction had to be complete in the 180 days. Thanks for clearing that up!

    1Reply
  • Mark Turok
    1031 Exchange Qualified Intermediary · Member since 2019 · 3 posts · 0 votes
    7y

    I’m familiar with the city and it can be a challenge for sure, but figuring out the proper structure to get this accomplished is doable - even considering the 180 day timeframe. 

    0Reply
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