New construction question

[Lamar Quinn]

Hey BP, I am in the middle of a new construction build and have a question for those who are familiar with building/selling new homes. The home is being built for me by a small builder and the price is 275k for 2800 square feet, 900 of which is below grade. A different (larger) builder has built 3 homes directly behind my lot and they have sold for 275k, 300k and 305k these houses are all identical and only have 1600 square feet and mediocre finishes. In my opinion my completed house will have much nice finishes and appliances. The question I have is, would I divide the other builders selling prices by his square footage to get a good estimate on what I could potentially sell my house for? I originally planned to live in the new construction but if I could flip it and do a tax exchange I would be intrigued. Any help would be great. Thank you, Lamar

[Dave Foster]

@Lamar Quinn, the issue isn't what you'd be exchanging into.  That would be perfectly fine to sell one and buy two as long as you spent at least as much as you sell (to avoid all tax).  

The issue is that the new construction is one of two things right now by your description.  It is either intended to be your primary residence or it is your intent to sell as soon as completed (which makes it inventory).  Neither of these qualify for 1031 exchanges.

Property that qualifies for 1031 is property that it has been your intent to hold for productive use in business, trade, or for investment.  Unfortunately both scenarios you describe do not match that intent.  So as it stands you cannot do a 1031 exchange on that property without running a strong risk of it being disallowed if ever audited.

However, there's a bright light at the end of the tunnel that is not a train.  If you do actually move into it and live in it long enough so that you can document that you have lived in it for 2 out of the previous 5 year period then you can sell that property and take the first $250K ($500K if married) in profit tax free.  

If you want to embark on this longer path you will find at the end that tax free is certainly better than tax deferred. In order to satisfy your desire for further investing now you could always take out a HELOC or other debt instrument on the new house and use it for investing.

The other option is to think of the new construction as investment.  Attempt to rent it.  Put a renter in for a year and then re-evaluate whether you want to keep it.  Now your intent can be documented as holding for productive use and you could do a 1031.