Can you use a 1031 exchange to build a property?

[Aden Brust]

Hey guys! I have a potential deal I'm about to go under contract on, there is just one hiccup. The seller is seller financing me the property with a balloon in 3 years if it appraises for the current purchase price in 3 years. She wants to build her dream home in 3 years and wants to use the proceeds to build it. She says she is worried about having to pay 47k in capital gains in 3 years which is a big chunk that could go towards building the house. The property I would buy is in her LLC but she would like the dream home she's building to be in their personal names, can she use a 1031 exchange at the end of the 3 year balloon when I pay her off and use those proceeds towards a new construction build? If not, are there any other creative ways you can think of where it would defer her capital gains? Theoretically in 3 years could I refi and pull out the money she needs and lend it to her to build the house?

I really would like to stick to seller financing on this deal because the terms she wants are amazing and it really could be a win-win all around if she gets to build her dream home. 

Just brainstorming! I’d love to hear any ideas! Thanks!

[Bill B.]

She can’t do a 1031 in 3 years because…

1) She already sold you the property today, in 3 years she doesn’t own it. 
2) She can’t use a 1031 for a dream home, only for investment properties…

Ps. If the property she is selling you isn’t an investment property obviously she never would have qualified. If it is an investment property she should sell outright today and do a 1031 and save $47k. I doubt she’s making an extra $47k doing seller financing. If it was her primary home she shouldn’t do seller financing and should just sell outright today tax free.