Building a 1031 Exchange

Hi! It’s TaxQuips time from TaxMama.com.

Today TaxMama hears from Sandy in Alabama who tells us. “I want to sell a rental house via a Sec 1031 exchange. Then I want to use the money, which will be in my attorney’s account, to add on to another rental house and/or build another rental house. Of course my goal is to avoid paying capital gains taxes. “

Hi Sandra,

You certainly may do a 1031 exchange.

But, I don’t know if you can use your attorney’s trust account. Be sure your attorney is experienced with the rules regarding accommodators for 1031 exchanges. Otherwise s/he could blow the whole transaction for you.

You can’t use 1031 exchange money to improve a property you already own, unless you bought that property within less than the 180 days before the new sale closes AND all improvements are completed within that total 180 day time frame. Reverse exchanges are a bit more complicated than regular exchanges.

When it comes to using 1031 exchange money to do construction, if you don’t complete the construction on the replacement property within the exchange period, the exchange may still go forward. But the exchange value of the replacement property will only include the land and construction work completed prior to the deadline.

Here is some more information about how construction works, when it comes to 1031 exchanges.

Oh yes, remember, if you don’t add any money to exchange, you will be paying taxes on ‘boot’ – the commissions and closing costs paid from the money the seller provided.

And remember, you’ll find answers to lots of questions, about 1031 exchanges and other tax information, free. Where? At TaxMama.com

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