creative 1031 with builder?

[Bryan H.]

I want to 1031 out of an underperforming condo in DC, into a new construction single family home. Timing a sale with the 180 day construction limitation is too short for a complete build. The basic theoretical idea is to make an advance contract/deal with the builder so I would be buying the property from him upon completion, rather than using my own funds from the sale to build the new house (because 180 days is not enough time). It would work something like this: I would delay sale of my condo until a couple months prior to timing of the new build completion date, so as to accommodate 1031 time requirements. Is this possible? 

[Dave Foster]

@Bryan H..  This would be perfectly fine as long as you do not take any beneficial interest in the property.  You can put your own money down as earnest money.  But all you are doing is going into contract to buy a property when complete.  It is OK to be under contract for your replacement property before your old property sells.  But you do have to wait until your sale closes before taking title to the new property.  Your earnest money can even be returned to you if not needed for the sale.  

We have a lot of clients that will do this so they can move from a property with high maintenance expenses and into a property with little cap ex exposure.  The one mistake that I've seen is when the client believes the time table of an over enthusiastic builder.  They close their sale and start their 1031 exchange two months before they think the new property will be available.  And then, "whoops" it ends up being 7 more months before the building is complete.  And they lose their opportunity to 1031 into it.

So hold your builder's feet to the fire on completion.

Wait as long as you reasonably can to sell your old property.

Don't be scared to put some back up properties that would be readily available (like a DST or a pocket listing from a friend) on your list.