I currently have a rental property that I am looking to do a 1031 exchange with. I found a property that has a house on it and believe the lot is big enough to split into two. I am curious about the legalities of buying the new property outside of the exchange, dividing the property and buying the empty lot with the exchange. Is there any way to do this? If I buy it through a trust or LLC does that work?
The reason I want to do this is because I would want to build on the empty lot but am not sure if I would be able to complete the build in the required 180 days. I would sell the exchange property for $420K and buy the empty lot through the exchange for $200K and take out a building loan for $220K.
If I own the property first I can make the first two months of improvements (site prep, utilities, permits, and foundation) before I sell it to myself through the exchange and make sure it is done by the end of the 180 day clock.
Does this make sense?
I am not planning on living in the house that I would be building but I might live in the house that is already on the property
@Kyle Carson , You can't exchange for property you already own. So buying the house and lot and then splitting the lot out and buying it from yourself in the 1031 won't work.
If the entity that buys the house and lot is a different unrelated taxpayer to you then sure it would work. But that's not just an LLC or a trust. It's a business entity set up with it's own TIN, filing it's own tax return, and with a different ownership composition than the tax payer for your 1031 property. So a multi member LLC where you own less than 50% would work. The problem is that then that entity is going to have it's own gain issues selling the lot to you after purchasing it.
I heard hesitation in your keyboard :) as you stated your intent with the property - "I might want to live in the first house....". I don't know the exact price for the house and lot but if the lot would be $200K then my guess is that the house and lot would absorb the entire 1031. Why not sell your current property and 1031 into the entire house and lot. Rent the house for a while and build the house on the new lot. Then at a later date if you wanted to move into one or the other converting part of the new 1031 property into a new primary residence.
That would absorb the entire 1031 and leave you with more options at the end of the day.
Thanks for your response, that is basically what I thought but I had hope. haha. So purchase price would be around $375K and I would be able to get much done in the way of construction with $50K. Also I would have to get through all the permits which cuts into the 180 days. On top of that I have not seriously listed my current property yet, just "Make me Move" through Zillow and the other property might sell before I can get everything together.
The house on the property would probably only rent out for maybe $1200. So I wouldnt be making as much as I do now and not even enough to cover the mortgage.
So if i was able to buy it outside of the exchange, I could take my time and get everything lined up. Also I would be able to almost wipe out the mortgage on the initial purchase once I sold the lot. It all did seem too good to be allowed but I wanted to make sure I at least looked into it.