1031 exchange for selling a Single-Family Residence (SFR)

[Amber B.]

1. Hello All!
2. I am considering a 1031 exchange for selling a Single-Family Residence (SFR) in order to purchase either a commercial land/pad site and develop houses/office buildings on it. I have a few inquiries regarding the implications of constructing and selling properties on the land.
   
   1. What strategies can be employed to minimize taxes when building a house on a piece of land and immediately selling it?
   2. If a commercial property is constructed on a pad site and subsequently sold, how can a 1031 exchange be utilized to avoid taxes? Is it possible to create a contract for sale after renting the property for a year?
   3. If I am converting raw land into individual lots and selling them, is it required to hold the lots for a minimum of one year?
   4. How do builders take advantage of a 1031 exchange to avoid taxes on houses they construct and sell immediately?
   5. Any other pros/cons?

     Pls advise. 

[Dave Foster]

@Amber B., If your intent is primarily to build and sell or develop and sell then you cannot do 1031 exchanges.  1031s are for property you purchased with the intent of holding for productive use.  And while there is no statutory holding period, builders and developers are scrutinized more closely.   You have to be ready to demonstrate that your intent was to hold.  Holding for more than a year Usually (emphasis on usually) will turn the gain from ordinary income to capital gain.  And would allow you to 1031.  But when you're a developer it's not always a sure thing.

Builders rarely do 1031s.  They're motivation is to sell inventory as quickly as they can.  1031 investors are generally buy and hold investors who end up faced with a motivatiing "reason" to sell.  When you try to combine those two types of investing there will always be more risk.  Not that it can't be done given enough runway.  But there is more risk.