1031 after a purchase

Member since 2020 · 7 posts · 0 votes

I own a STR in Wells, Maine. I may sell it now (next 6 weeks) and realize roughly $1M of gain. In January I purchased another home that is not yet approved for subdivision but I expect it will be fully approved in the next few months and am knocking down the existing home and developing four homes. I intend to keep two as investment STRs and sell two. Can i still do a 1031 or is there any structure involving an improvement exchange, reverse exchange, parking arrangement, or subdivision strategy that would allow me to defer some or all of the gain into one of the retained homes?"

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Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

3mo

You could have if you hadn’t bought the dirt already. Once you own it nope, can’t do anything. All the options you named involve the 1031 QI buying/holding the dirt instead of you.

Might be worth looking for another property to purchase in order to save $300k+ in taxes.

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3mo
You could have if you hadn’t bought the dirt already. Once you own it nope, can’t do anything. All the options you named involve the 1031 QI buying/holding the dirt instead of you.
Might be worth looking for another property to purchase in order to save $300k+ in taxes.
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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
3mo
@Matthew Fermino, a couple thoughts:
1. You should have talked to a 1031 intermediary early on! They know the ins and outs because its precisely what they do.
2. You might have been able to do a REVERSE 1031 exchange if you had planned ahead.
With that process, you buy the replacement property FIRST, but its held in the exchange until you sell the subject property and complete the exchange.
Since the purchased property is held by the exchange for a while, there are technically 2 transfers for that deal and possibly extra costs/transfer taxes depending on the state.
3. Since most tax related things require arms length transactions, now that you already own the property to be developed it is almost certainly too late to incorporate that into any exchange.
4. Talk to a 1031 intermediary about other options where you can defer the proceeds of your upcoming sale. There are options to put it into something more passive if that suits you better to allow you to focus on those development projects.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3mo
@Matthew Fermino Unfortunately, @Bill B. is right. You cannot 1031 into property you own. As far as any future 1031 exchanges go, @Kevin Sobilo threw out a few good options, like a reverse or construction exchange. But even a reverse construction exchange will not work on property you already own.

Your QI (qualified intermediary) would set up an EAT (Exchange Accommodating Titleholder) to take title to the replacement property for 180 days or until the construction or improvements are completed and transfer ownership to you once it's done.

These are more expensive than traditional exchanges, and lending can be difficult, but with a $1M taxable gain be very much worth it. Just be sure to have a QI in place prior to any sale in the future.
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Dan WeberBusiness Member
Realtor · Portland, ME · Member since 2015 · 655 posts · 552 votes
3mo
@Matthew Fermino give Maine Exchange Services a call. They're great, I've used them a number of times both personally and with clients to do both regular 1031 and reverse 1031 exchanges. She can break down your options for you in detail.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
3w
@Matthew Fermino, a 1031 is still possible here, but the timeline and structure need very careful handling given you're selling in 6 weeks and the replacement asset doesn't exist yet as four separate approved lots.

Since your Maine property isn't subdivided or fully approved, you can't directly exchange into two finished homes today, they don't legally exist as distinct parcels yet. A reverse exchange through an Exchange Accommodation Titleholder is the mechanism that fits this situation, the EAT would need to acquire and park title to the replacement property (or your interest in it) before or at the time you sell the Wells property, since you can't take title to the replacement first and exchange into it after under a standard forward exchange once you're this close to closing. You have 45 days from the sale to identify the replacement property and 180 days total to complete the exchange, so the subdivision approval and at least substantial completion of construction on the two retained units would need to happen within that window, that's an aggressive timeline given you said approval could take a few months.

An improvement exchange, sometimes combined with the reverse structure, lets construction costs on the retained homes count toward your reinvestment requirement while the EAT holds title during the build, but only construction completed within that 180-day window counts, any work finished after the deadline doesn't count toward the exchange even if the property is legally yours. Given the six-week timeline to your sale, get a qualified intermediary and exchange accommodation titleholder engaged now, before you even list, this structure needs to be in place prior to closing on the Wells property, not decided afterward.

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Diana Khan
Attorney · 10451 Mill Run Cir #755 Owings Mills, MD 21117 · Member since 2024 · 311 posts · 115 votes
3w
@Matthew Fermino, one thing I would look at closely is how you plan to use each of the four homes once the project is finished.

Since you plan to sell two and keep two as STRs, the intent behind each property matters. Property held mainly for resale can be treated differently from property held for investment, so I would not assume all four homes fit into the same 1031 strategy just because they come from the same development.

I would also make sure the costs, value, and ownership of the two homes you plan to keep are clearly tracked from the beginning. With a project this large and a $1M gain involved, I would have the QI, CPA, and real estate attorney working together before the Wells property closes.

That coordination early on could make a big difference here.

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