Can I 1031 from a syndicated land deal?

Question

A group of investors including myself purchased land in the Midwest which has been developed for sale to be bought by builders. My question is I want to be able to 1031 exchange my proceeds from this development project into acquiring other real estate properties. However, these plots of lands are going to be sold to the builder/developer in segments, likely spanning a period of 12-16 months. Would each time I get a distribution of profit need to be handled as a separate 1031 exchange, or can I have the 1031 intermediary "hold on" to the capital until all profits have been distributed?

Thanks!

Jay Hinrichs · Answer

@Sendhil Krishnan @Dave Foster  Dave I have seen this many times over the last 30 years.

unless they thought this threw up front I suspect this is inventory and they are in the business of creating lots to sell to builders and subject to ordinary income and the managing members are privileged to pay SET as well.

I would think like you said the only out for him is to sell his % to someone one time and exit.

Many times when I buy plats this is the case.. the seller won't record the platt for tax reasons IE they don't want to create inventory and by recording the platt boom its inventory..

So just my limited experience is all.

if Sendhil Is making a profit and not subject to SET then hey just pay tax move on this kind of deal should be a VERY high profit deal since land development for builders is also one of the more risky things one can invest in.. IE subject to market swings and builders deciding not to buy.

Account Closed · Answer

Sendhil Krishnan:

Unfortunately, you are in a situation which does not lend itself to taking advantage of the deferred tax provisions of Section 1031.  It sound like what you have are parcels of land for sale that were cut out of a larger parcel, similar to a platted subdivision.  If so, you have "inventory that is available for sale to the public" and not "property held for investment in a trade or business" as required by Section 1031.

Michael Lantrip.

Dave Foster · Answer

Nail on the head @Jay Hinrichs.  It used to be very easy to set up a simple land bank to "sell" the developed asset into in order to either enjoy cap gains or do a 1031.  The IRS has gotten very tough on that and while can still be done especially when using multiple corporate entity structures it aint easy and has to be well thought through prior.  Expensive legal counsel helps immensely of course.

Although, there is still a school of thought that only the actual moving of dirt creates inventory and recording a plat is simply codifying best and highest use.

Dave Foster · Answer

@Sendhil Krishnan, Much is going be dependent on the structure of the entity that owns the property, the stated purpose when purchasing it (resale vs investment hold/use), type of improvements to date (entitlement only or actual on sites/infrastructure).

You're not going to be able to use a 1031 or 1031s to handle a structured timed sale of your % to a builder/developer.  However, you may be able to sell your % to the other investors as one sale and go forward with a 1031...

if the corporate structure can handle it appropriately,

if you can say/demonstrate that your intent when you went into the deal was to hold the property for productive use and now that the groups direction has changed you are selling your portion to purchase other property to be held for investment.

And if the improvements to the property would not cross the threshhold of "creating inventory" and could be classified as ensuring best and highest use.

There's also a small chance that the entity as a whole could create a separate corporate structure that would act as the dealer and leave the entity free to sell to that second entity and use a 1031 to pursue other productive investment real estate.

Tis a complicated puzzle that needs quite a bit of fleshing out to really see what's possible.

Sendhil Krishnan · Answer

@Dave Foster and @Jay Hinrichs and Account Closed

Thank you all for your thoughts... I may just hold on to my percentage and just bite the bullet and pay the taxes on them. At least they are long term capital gains and I can always reinvest the proceeds into real estate!

Account Closed · Answer

If we are talking about a business entity, you will probably be receiving something like a K-1, which will show your income, the type of income, and any pass-throughs and adjustments.  And if it is a business entity, there is probably a bookkeeper/accountant or someone with that knowledge keeping the books.  That person can tell you the situation.

Account Closed · Answer

Sendhil Krishnan:

Jay Hinrichs is correct.  What you need to do is look back at the time you acquired the property.  Was it purchased by a legal entity such as a corporation or partnership, or was it purchased by a group of individuals.  With a project like this, a business entity is usually formed.  This determines "who" the taxpayer is when the property is sold.  That determines which types of tax forms will be filled out to report the profit on the transaction.  And that will determine whether you will be paying SE tax or not.  It will be on the form.  But it is pretty certain that this will be ordinary income of some type instead of capital gains.

Jay Hinrichs · Answer

@Sendhil Krishnan   again I don't think they are long term capital gains I think its ordinary income what you don't have to pay if your not the managing member and just a member is SEI tax

Can I 1031 from a syndicated land deal?

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