New Construction Investment

[Lia Locarnini]

Hello! I am a new 1031 investor looking for a replacement property during this hot seller’s market.  It is a challenge to find a suitable property with the low inventory and high prices.  I am focusing my search in Texas, mainly Austin (but am keeping my eye on other areas too).  My question is whether or not it is ever practical to purchase new construction for investment purposes.  Home prices are being driven up so much with bidding wars and I am seeing what appears to be comparable pricing to buy new.  It seems contrary to the rules of investing to even consider new construction, but in this marketplace and considering the tax savings to buy with a 1031 exchange, I am considering this.  I would appreciate any feedback on the topic.  Would any of you, more experienced investors, consider new construction? (Note: The 1031 rule requires that the new construction be complete and the sale  closed within the prescribed timeframe.)

[Bill Exeter]

Hi @Lia Locarnini, 

There are two ways to accomplish this type of 1031 Exchange. 

One way is new construction.  The builder or developer will complete the construction and you would identify and acquire the finished property as part of your 1031 Exchange transaction.  This would be a standard or regular Forward 1031 Exchange.  The risk here is that the builder or developer may not complete the construction in time for you to acquire it as your replacement property during your 180 calendar day exchange period. There can be all sorts of potential delays, including weather, labor strikes or walk outs, or other problems. 

The other way is an Improvement 1031 Exchange or Build-To-Suit 1031 Exchange.  You would identify the replacement property, have the Qualified Intermediary acquire and hold or "park" legal title to the new replacement property, and then build out the new property while the Qualified Intermediary is parking legal title to the property.  You would still have the typical 180 calendar day exchange period to worry about.  This way is more complex and there are additional costs involved.  The permitting process, etc., alone can cause all sorts of delays.  

So, it can be done, and has its merits, but also has its risks.  Planning is key here, especially for things that can go wrong.  Keep your eye on the timing involved and the deadlines.