1031 into new construction but already own land

[Ben Vandorn]

I would like to 1031 out of an investment building that I have owned for several years and exchange into new construction buildings on raw land that I already own (paid cash for land a few months ago and construction has not yet started). 

A local exchange provider told me I would need to be off title of the land for 180 days for this to be possible; ie, sell the land to the builder and buy back completed buildings. 

My CPA said this is a grey area and that the IRS might disallow the exchange since I would've previously owned the raw land.

Has anyone been through something similar or know if this is correct/incorrect? 

Regards,
Ben

[Bill Exeter]

Originally posted by @Ben Vandorn:

I would like to 1031 out of an investment building that I have owned for several years and exchange into new construction buildings on raw land that I already own (paid cash for land a few months ago and construction has not yet started). 

For future reference, this could have been structured as a combined Reverse 1031 Exchange and an Improvement 1031 Exchange.  The replacement property to be built on would be acquired and held by us as your Exchange Accommodation Titleholder, and then the improvements would be made between then and the end of your 180 calendar day exchange period.

A local exchange provider told me I would need to be off title of the land for 180 days for this to be possible; ie, sell the land to the builder and buy back completed buildings. 

This would be the safer way to go.  There is an IRS  ruling that is somewhat related to your situation that effectively equates to the 180 days referred to by your local provider.  There would be risk depending on how you structured the scenario.  The only way to avoid  the risk is to sell the property to someone what would assume all risks, benefits, burdens, gains, losses, revenues and expenses related to the property for at least 180 calendar days.  You would not be able to reimburse any expenses, costs or losses, and you would not be able to guarantee or indemnify the temporary buyer/owner for/from anything.  The more strings attached the more risk that you will assume. 

My CPA said this is a grey area and that the IRS might disallow the exchange since I would've previously owned the raw land.

Yes, your CPA is correct unless you structure it correctly.  See comments above. 

Having said all of this, there is another possible solution, but it will also have risks involved with it.  There are three (3) Private Letter Rulings (PLRs) that essentially allowed the taxpayer to building on property that the taxpayer already acquired/owned.  The level of risk would be two fold.  First, only the taxpayers that requested the Private Letter Rulings can actually rely upon them; the rest of us could follow them exactly and the IRS could still disqualify our transaction.  Second, it would depend on how closely you can mimic the Private Letter Rulings.   The further that you stray from the structures outlined in the Private Letter Rulings the more risk you will take on.