1031 Exchanges

[Jason Faucher]

Can I sell a spec home and turn around and use the profits to buy a vacant piece of land that one day I will build a home on for Primary residence under the 1031 exchange rules? 

[Bill Exeter]

Originally posted by @Jason Faucher:

Can I sell a spec home and turn around and use the profits to buy a vacant piece of land that one day I will build a home on for Primary residence under the 1031 exchange rules? 

Hi Jason,

Let me simplify the answer for you.  There are two primary requirements to meet when structuring a 1031 Exchange, which are the Qualified Use and Like-Kind requirements. 

Qualified Use Requirement

The first is that the relinquished and replacement property must satisfy the "Qualified Use" requirement.  Qualified Use means that you have the intent to hold the relinquished and the replacement properties for rental, investment or business use purposes.  Properties held for sale do not qualify for tax-deferred exchange treatment.

Generally, a spec house is bought and held with the intent to build the SFR and then sell the property and would therefore be classified as inventory held for sale and not property held for investment purposes and would not qualify for 1031 Exchange treatment. Property acquired with the intent to hold and use as your primary residence would also not satisfy the Qualified Use test since it will be used for personal use.

However, if you bought, built and held the property with the intent to hold for rental, investment or business use purposes, then it would qualify.  And, if you bought the vacant land for investment purposes, then it would qualify.  Your intent may change later.  The key issue here is intent.

Like-Kind Requirement

The second requirement is that the relinquished and the replacement properties must be Like-Kind properties, which means that they are both real estate.  It is as simple as that.  You must sell real estate and you must buy real estate in order to satisfy the like-kind property requirement. 

So, satisfying the Qualified Use test is the most critical.