1031 Exchange Build to Suit

[James Lee]

Hello all, my family is planning to do a 1031 exchange where we sell a multifamily building we own in New York, to buy a piece of land in Texas and turn it into a manufactured home community. Funds from the sale would be used to acquire the land and build the manufactured homes. I'm aware that this is a more complicated and costly version of a normal 1031, and wonder if anyone has any experience doing one of these. What kind of things should I watch out for? Thank you for any assistance!

[Dave Foster]

@James Lee, A build to suit exchange is exactly what you're talking about.  It's actually a form of a reverse exchange where the QI takes title to the land and then it is improved until it is at the value it needs to be to satisfy the 1031 reinvestment requirements.  Then the client completes their regular 1031 exchange by purchasing the newly constructed property from the QI.  I'll reach out via pm to give you some more resources on the topic.  Here's the challenges

1. Financing can be trickier.  If you have cash of your own or if you wait to start the construction part until you've closed your sale then you can use the exchange proceeds for the construction.

2. Price . - yes more costly but not prohibitive.  Less than the tax on a $50K gain.  

3. Timing - The IRS handcuffs you more now.  In a regular 1031 you have 180 days to purchase your replacement.  In a reverse or build to suit you have 180 days from the day the QI takes title to the lot to complete the construction.  This is not a lot of time in construction land.

4. You post isn't clear but you'll want to remember that the 1031 is meant for property you intend to hold for productive use.  If you want to build a manufactured home community to own the lots and structures and rent them that would qualify.  If you're thinking to create finished lots and sell them or to build houses on the lots and sell them, the IRS will call that creating inventory and you'll lose your benefit of the 1031 and pay ordinary income tax on the profit.