1031 exchange

[Craig Teeter]

Can anyone tell me if I can do a 1031 into a new build?

Example: I build 3 four plex buildings, rent them for a year and sell. Can I take the profit and put it down on a new-construction project then refi when I'm done and pull some of the cash back out?

[Dave Foster]

@Craig Teeter, The answer is sure.  Just a couple of things to think about.

1. When you build the 4 plex buildings and rent them make sure that you are going into it as a long term hold and then re-evaluating your position every year.  If the IRS believes that your intent from day one was to sell then they could classify as inventory and negate the possibility of a 1031.  Usually a year is satisfactory.  But if you put a for sale sign up day one or if you list it pocket or otherwise, or if you document somewhere that your intent is to sell as soon as the new construction is complete, then you potentially open Pandora's box. 

Build the 4 plexes to hold.  Treat them as a hold.  Then re-evaluate after a year.

2. You can certainly 1031 into a new construction project.  Here's some criteria you'll need to pay attention to.

a. You'll need to take title to the new construction within 180 days of when you sell your 4 plexes.

b. You can't take title to any part of the new construction before you sell your 4 plexes (unless you're planning on doing a reverse exchange which is certainly possible but more complicated and expensive).

c. The new construction is worth at least as much the 4 plexes you are selling (or you pay tax on the difference).

3. Cash out refi - As soon as you complete the 1031 you may then do a cash out refi.  A very common scenario.