1031 Exchange and New construction

Hello everyone,

I was referred to this group by a local real estate investor to post my question.

Here are the details. My mother died several years ago and left me several acres of land in a pretty desirable section of our city. I’ve waited just over a year from the settling of her estate to think about selling the property.

I currently rent an apartment and have planned that the proceeds of the sale would be used to purchase a new house. Well I listed the property recently and are entertaining offers.

How will the 180 day rule be applied for new construction? The current builder is taking from 6 - 9 months to complete the house I’m interested in. They do have spec houses for sale but I’d rather have a new house built just the way I want.

If an exchange is not possible due to the length of construction time what other ideas are there to reduce any taxes during this process?

unfortunately, this is not a 1031 exchange. The replacement home can not be your primary residence. It woudl need to be in service as rental property for some period of time prior to be onverted to a primary residence (I think its one year working from memory)

Moreover, the construction is an issue as well as any part of the construction not completed by the end of 180 days would not be considered replacement property. Only the value of what was identified and constructed during the allowed time periods.

Your residence is not eligible for a 1031 exchange. You would have to exchange the investment property for another investment property.

Mark Wagner, CPA

If you inherited the property just about a year ago, what was the value of the land at that time? Has there been sufficient appreciation since then that you will even have a capital gain if you sell?


That’s not the answers I was hoping for. The property has trippled in value.

Is there another tax strategy that will help me reduce my capital gains taxes?

You may not have any capital gain at all. What was the value of the land at the time you inherited?

How much will you sell it for now?

The difference is your taxable profit. You say the value of the property has tripled, but did it do that in just one year?

Right. Tripling from $1,000 to $3,000 isn’t too bad. Tripling from $100,000 to $300,000 is a little more serious.

And remember, inherited property is valued as of the date of death (or 6 months later), so determining the value as of that date is of utmost importance. Your gain will be what you sell for in excess of the value as of the date of death. The higher you can get that value (legitimately, of course) the lower your gain.

The property was values at approx $400,000 at death. I co-own with 2 other siblings and could see from 300-$400,000 once this is all over. The property was just listed and we have several offers to consider.

Does this information help? make any difference.

Let me clarify my post…

My gain on this property could be around 300,000.

Yes, it does help clarify your question. No, it does not make any difference for the scenario you proposed. Your best tax deferral opportunity is to do an installment sale. An installment sale does not reduce your tax bill, it just spreads it out over the term of the loan you give your buyer.

Unless you roll the land over into a new investment thru a 1031 and then finance your house traditionally. That would defer the gain, plus give you some additional annual deductions that you might miss by owning “free and clear”. And the opportunity for your new investment to continue to grow as well.

I would think that financing should be simple, since your balance sheet would be strong, assuming that your income was sufficient for the purchase.

You have a powerful asset at your disposal. I would urge you to consider all of your options before deciding to “use” up the asset to purchase your house. You have the opportunity to begin creating quite an investment portfolio with this transaction.

Best of luck to you.