1031 Exchange question

[Blake Johnson]

I would like to sell a property we own for $175k and use the proceeds in a 1031 to buy a lot with an abandoned house, tear it down, and build two duplexes values at 375k together. Is this possible to do within a traditional 1031? Also, If the lot was purchased before close of other property, could you “reverse 1031” into it? 

[Dave Foster]

@Blake Johnson, A "reverse or construction" exchange exists because you cannot take title to your new property before selling your old property, and, you cannot exchange into improvements made on property you already own.

So in a construction exchange your intermediary for the 1031 takes title in a special entity and holds it until you have completed your improvements and sold your old property.

Reverse exchanges are pretty costly and complex. and you only have a maximum of 180 days to complete the improvements and take title to the new property.  But they can work very well in the right circumstances.

In your situation you may find that it's just as easy to sell the $175K property and 1031 into the land only (depending on the cost of the new land).  Then simply use the land as your collateral and take out a construction loan to build independent of the 1031.  Even if the land was $20K or so cheaper than the property you're selling you would only pay tax on the difference between what you sell and bought.  And that would probably be cheaper than a full on reverse.