Question regarding 1031

[Thor Bonaventura]

Hey guys new to this platform but I have a question if anyone can help. I am currently building a property and realized that that taxes from the sale are going to be substantial so I considered doing a 1031 then getting into multiple smaller properties then rent them out. The issue is after learning about 1031 it says it can’t used on a property that is just built to sell which this house is being a new build. Is there a way I can still do a 1031 without say renting it out for a year or two when it is complete? Also how long would I need to rent it out for to be considered applicable for an 1031? Any advice would help!

[Bill B.]

Nope. Building a home for sale is the same as house flipping. It’s a job not an investment. If there are substantial taxes to be saved you “build to rent”.  Build the property, rent it out for a couple years and then exchange it for other rentals to defer the taxes. You don’t avoid them, you defer them. 

There are even more savings if you do the exchange from a state with state income tax to a state without them if you then hold until you too live in a tax free state. 

[Ashish Acharya]

For a property to qualify for a 1031 exchange, it generally needs to be held as an investment or for productive use in a trade or business, which typically excludes properties built with the intention of selling. However, you could still make the property eligible by renting it out for a period before selling. While there’s no hard-and-fast rule, many experts suggest renting it out for at least a year or two to demonstrate that it was an investment. This approach would allow you to use a 1031 exchange later to defer the capital gains taxes when you sell.