Can you 1031 Exchange into New Construction?

1031 exchanges acquiring deals financing a project multifamily financing real estate financing real estate investing Dec 31, 2021

Let's say you're wanting to build a duplex and would like to use capital from a 1031 exchange to finance the deal. Is that possible? Can you 1031 into a new construction home or commercial investment? What would that look like? 

Our hosts have been putting together build-to-rent deals for a while now and it's about time we discuss what we've seen in the market and what we've discussed with our accountants/1031 tax-deferred exchange accommodators. 

There are many rules and criteria associated with 1031 exchanges. We recommend you meet with your accountant and your 1031 accommodator to discuss details and make sure that you're compliant.

There can be some unique intricacies to 1031 that we've found when you go to do a build-to-rent deal.

  • When it comes to when you close on new construction, what do you actually own?
  • When do you own it?
  • And how does that apply?

Sherida Zenger: I think one thing that makes us different when you're closing on new construction, you're actually taking title to the. So that's one of the key things in the 10 31 exchanges, you have to take title to that property within that 180-day mark.

180 days of when you closed on the departure property. So the property that you sold, if 180 days to actually close on the property that you're acquiring, you have 45 days to identify a property. 

Chase Leavitt: It gets a little bit tricky when you're buying a new construction multi-family property. You have to time that accordingly.  

Sherida Zenger: We're pretty good with people saying, Hey, if you're going to do a 1031 exchange, talk with us. 

We recommend using our accommodator Karen Weeks at United West Title because she's phenomenal but talk with us because we don't want you to identify something that ends up not being property.  

Chase Leavitt: Does there have to be a CFO in order to 1031 exchange into it?  

Sherida Zenger: No. No, because you're taking the title, and again, you're having the value. Whatever you sold your property for. Less some commissions and title fees. That's what you have to replace it with.  

Usually, most of our investors are maybe buying two or three or four more of our properties because they can take the land value when they close. And then some of the construction, depending on how far we're going to get into it. 

So that's one of those things we always say to people, if you're going to do a 1031 into something that we do talk with us first, let's chat with it. Cause you're not going to be. Sell something for eight 50 and buy our fourplex from us for 900 and fulfill that exchange within 180 days. It doesn't work that way, but we can accommodate exchanges. 

We're just gonna have to split the money out a little bit. Cause you can divvy out how you do your money. I want 30% here. I want 20% here. I want 50% on this other property.  

Steve Olson: As I understand it, it's, it's ultimately about proving, like you said, what you owned and when you are.

Some people take, kind of take a gamble. They say I'm going to buy this property for a million dollars. And even though it took 18 months to build it, I'm still claiming the whole million because I'm going to get audited maybe in three years, and good luck proving what I owned and when I owned it... But that's actually on you, you've got to prove it. 

I think they're probably just planning on saying here are my closing documents and what I paid. I don't know if that holds water or not. And I prefer to never find out. Right. But the best part is as well, take what you paid. And if you've got copies of approved loans and vertical budgets, you could probably be any reasonable person. 

And, and by the way, like 50 CPAs, have agreed with us on this. You could subtract that vertical budget from your overall price and get to a land value that way.

Could you not?  

Chase Leavitt: And out of the 10 years, we've been doing this, have we ever had anyone that's done a 1031 exchange into new construction? 

I don't know yet. I haven't personally. I've had some clients. They have not been audited yet.  

Sherida Zenger: Another thing that can help as a safety net. If they want to make sure they play by the rules, we obviously have bank draws.

So if you're kind of trying to get as much out of it as you can, we have monthly bank draws, so you'll be able to say, okay, so here was my land, but I've had five draws that equaled 150,000. So at this point, my property was worth X. Because of the one value in the draws.  

Steve Olson: I think you're talking about what I've heard referred to as a build-to-suit exchange. And I've heard it called a bunch of other things. There are so many kinds out there and I never know we should get a really good accommodator on the show and interview them. 

In this case, you say, the accommodator creates a temporary entity. That takes the title. Right? So you sold your exit property on January 1st. 

By the letter of the law, you have 180 days. Let's just call it June 1st. You have until then to close on the replacement property. In new construction, the rationale being well, what if I closed on dirt in February? So now I have five more months to do construction and build value into this property above and beyond the actual land value. 

Right. I have that, that period of time. So, the title company has to take title through that. It's called an E I can't remember what that stands for, like an exchange. Asset tries something like that. There's an entity, a specific time they use. And so then you come in towards the end of May and you actually close at that point. 

That's when chase Levitt shows up on the title cause Chase Leavitt exited the title in January shows up again on the new property at the end of May. He's going to take that, that land value, and add up all those bank draws that had just been talked about. And that's the value he claims. Right. And that's that, that holds water... 

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