New construction 1031 exchange

[Kyra Ames]

Hi, my husband and I are getting ready to use a HELOC on our primary residence to build a 2nd single family rental on a lot that we are having surveyed and separated from an existing rental house. We originally were going to fund the entire construction with the HELOC then roll it into a refinance. However, because we have quite a bit of equity in the first property, we've decided to sell it and pay off the new construction with the proceeds...can we do a new construction 1031 exchange instead?

[Milton Rivera]

@Kyra Ames

The restrictions around the 1031 exchange have to do with the "alike property" and timing.  In principle, if the property is new it should not matter (think if you were buying a new home from any home builder).  The issue you may run into is the timing.  You have 45-days from the sale of the old property to "identify" the replacement property(ies) and 180-days to close.   

In this case, some of the questions:

• Can you actually get the property build and close within six months?  You will need to have all plans, specs, permits, etc. in place so that the contractor has six months to actually built.  
• How will the property be financed?  The builder will want draws at certain milestones (poured slab, framing completion, mechanical/electrical rough-in, etc.)  Is the builder going to front all of the constructions costs?  Can be done but you will pay a premium for them to carry the loan.  

Depending on the actual capital gains the 1031 exchange may not be worth the tax savings.    

Good luck