Arbitrage a 1031 in land??

[Tyler Warne]

A developer has a property under contract right now, he has the engineering done so that he will be able to develop the apartments. Meanwhile he is selling a property that is in another town and would like to 1031 the proceeds to this land. However the other property will not sell in time for this one to be named. Can I buy the property, hold it for 3 months and then sell it to the developer? Are there any rules against this? Risk is low but his reward and what he is willing to pay is high. The sellers have been dragged along to long and are unwilling to do another extension forcing this buyer to be exposed to maybe $500k in tax liability. 

Thanks! 

[Dave Foster]

@Syed H. and @Eric P., "like kind" is really determined by use and intent not type.  So a 1031 from buildings into raw land is perfectly fine as long as it is being held for investment.  Where the developer may have an issue is that he may have an uphill battle to prove after the fact that he purchased the land with the intent of holding for productive use.  If he builds on it he's going to change the nature of the real estate enough that the IRS could very easily say that his original intent was not to hold but was to construct and resell.  This would classify him as a builder/dealer and hes going to pay ordinary income on the income from the construction sales.  But certainly he could be purchasing this land to hold with the possibility of future development or other use.  That would make it an eligible 1031 replacement.

The issue that @Tyler Warne is asking is can he purchase the land and then later sell to the developer?  First of all from the developers perspective this is really nothing more than a reverse exchange where an unrelated party takes title and holds it until the developer completes his sale and is able to 1031 into that new land.  Very doable.  if he's going to do it DIY with you Tyler then there will be some elements of arms length that the IRS has addressed that you'll all need to be wary of.  This is actually the reverse exchange exists.

From your perspective there's going to have to be a profit motive for you to hold it.  So what's your endgame?  If you're buying it to only hold for a short time for the developer then a 1031 isn't appropriate for you so . you need to be ready to recognize a short term gain and pay tax on that.