1031 Exchange on a New Construction

[Megan Elliott]

Hello! I was wondering how the timeline would work if you used a 1031 exchange to purchase a new construction.  I am assuming the house would need to be complete and closed on within the 180 days, but I figured I would put it out to the experts.  Is there any leniency if there are construction delays?  Thanks so much!

[Dave Foster]

@Megan Elliott, There's a little bit of nuance here that could work for you.  

The construction does not have to be complete.  And a C/O is not a requirement either for the 1031.  Say you are approaching your 180th day and have sold a $400K property and your new construction with land and building will cost $500K,  If you can document that the new property is 80% complete then you can take title to it unfinished and have a separate agreement with the builder to complete the construction.

Of course financing can get in the way here since a lender will probably not lend if the house doesn't have a c/o.  But if you're working with your own cash or a private lending situation this is very doable.

Since it's almost impossible to get construction from ground up done in 180 days you may want to explore situations where the builder is using their own financing and stock of lots.  Go into contract to buy a completed house on a lot that is currently under construction.  When you're within in 2-3 months of the house being completed you execute the sale of your old property.  That gives you a couple months leeway for builder issues.