top of page
Residential Buildings with Solar Panels

1031 Exchange for New Construction

New construction, when combined with a 1031 exchange, is a remarkable opportunity for significant tax advantages and investment growth opportunities. At 1031 Pros, you’ll get expert management of new construction exchanges, allowing investment in tailored real estate projects. 
Image by Sieuwert Otterloo

What is a New Construction 1031 Exchange?

Also called Build-to-Suit or improvement exchanges, these let you use the proceeds from the sale of a relinquished property for new construction, improvements, and renovations on a like-kind property. If the value of the replacement property is less than the one you sell, improvements can increase the value enough to meet the requirements for full deferral of capital gains taxes. 

Benefits of New Construction 1031 Exchanges

In a traditional 1031 exchange, you simply buy a like-kind replacement property; in a new construction exchange you also use some of the proceeds from the sale to make improvements on the new property. This could include adding new buildings, renovating existing structures, or even building from scratch. In total, the value of the replacement property (including improvements) must equal or exceed the value of the relinquished property. Making improvements allows for significant property appreciation, so long as the transaction is properly structured.

Image by krakenimages
Screenshot 2023-10-13 at 9.31.28 AM.png

Eligibility and Requirements for a Construction 1031 Exchange

As with all 1031 exchanges, the property must be for business or investment use and you must complete the transaction within a time frame. This can sometimes be challenging, as the replacement property must be identified within 45 days of the sale of your relinquished property, and acquired by the buyer within a total of 180 days. The replacement property must include not only a description of the real estate in its current form, but also as much detail as possible about the intended improvements. 

Financial Planning for New Construction 1031 Exchanges

To fully defer capital gains taxes, all of the exchange equity must be invested in products and services on the new property; any unused funds are taxable. Exchange Funds that have been placed in escrow for post-closing improvements do not qualify, even if the funds are deposited before you take the title.

 

If the exchange funds do not cover the acquisition and improvement of the new property, additional funds can be loaned to 1031 Pros as the Qualified Intermediary, who in this type of exchange also acts as your Exchange Accommodation Titleholder (EAT). If you need a construction loan from an institutional lender, you should seek lender approval prior to starting the exchange. You can also partner with your developer, using a construction reserve in the exchange account. 

 

Acting as project manager for the construction, you will send invoices to 1031 Pros, as your EAT, to be paid directly to your vendors. During the exchange period, you cannot be reimbursed for any advances or expenses incurred. As you are allocating a budget for the construction project, always be aware of potential cost overruns! 

Construction 1031 Exchanges, Step by Step

1

Contact 1031 Pros for advice on structuring your New Construction 1031 Exchange.

2

Because Section 1031 does not allow you to own both properties at the same time, you will sell the relinquished property through 1031 Pros, acting as your EAT, or in some cases acquire the replacement property first through a parking agreement.  

3

We will set up a special purpose entity, often a single member limited liability company, that is used to acquire and park the title to your replacement property during the exchange. 

4

We will work with you to use exchange funds to improve the new property. 

5

At the end of the exchange, the new property and any construction loans will often be transferred to you through the holding entity, rather than by a deed. We will work with you to ensure compliance with all tax and other legal issues.

Choosing the Right Property and Location for a New Construction 1031 Exchange

As with all real estate transactions, you will want to look at the economic stability of the area where your new property is located, as well as local demand for the type of your new construction. It’s important to understand market trends and future growth potential, and we’ll work with you to help make sure that you select the right replacement property. 

Image by Paul Hanaoka

After Your New Construction 1031 Exchange

As experts in 1031 exchanges, we offer ongoing support including help with long-term investment strategies, access to a network of property managers, real estate companies, and financial experts to make the most of opportunities. 

Potential Risks of New Construction 1031 Exchanges

The Ticking Clock

In order for you to have a successful exchange, the 180 day timeline is a hard and fast rule – and with new construction there are often delays during project improvements. It is important to engage experienced contractors and maintain contingency plans. We’ll help you with smart planning for your exchange.

Market Changes

Changes in market conditions during construction can happen, potentially reducing the replacement property’s value. Conducting thorough market and feasibility studies is wise. We’ll help you set strategies in place to mitigate this risk.

Financial Challenges

Construction projects also often experience budget overruns, so it’s important to plan for them. If you are taking out a construction loan to make improvements to the new property, finding a lender who is familiar with 1031 exchanges and comfortable with construction loans can be a challenge. We’ll help you navigate the process and set you up for success.

Legal and Regulatory Compliance

We implement strict internal controls to ensure full compliance with state and federal regulations, including recent updates to laws affecting 1031 exchanges. At the close of your exchange, we also provide you with all necessary tax documents so you can benefit from a fully deferred tax exchange.  

Screenshot 2024-03-21 at 8.46.42 AM.png

We Are Experienced Qualified Intermediaries in New Construction 1031 Exchanges

At 1031 Pros, we are ready to bring our knowledge and expertise to your Build-to-Suit 1031 Exchange. We are specialists at setting up special purpose entities that will protect you from any liens and judgments, coordinating between parties, managing construction funds, and ensuring compliance with all 1031 rules. 

Get Started
  • What type of property qualifies for a 1031 exchange?
    Any property held for productive use in a trade or business or for investment can be exchange for like-kind property. "Like-kind" refers to the nature of the investment. Any type of real property can be exchanged for another type of real property. For example: A single family rental can be exchanged for a duplex. Raw land can be exchanged for a shopping center or an office space for apartments. Any combination will work. This gives the investor flexibility to change investment strategies to fulfill their portfolio needs.
  • What Does Not Qualify?
    A personal residence, developed lots, home flipping, partnership interests or property held for resale immediately after acquisition. Second homes may or may not qualify depending upon the use and how it's reported for income tax purposes.
  • What kind of exchanges does 1031 pros handle?
    We handle all types of exchanges: Delayed Exchanges, Reverse Exchanges and Build to Suit Exchanges. From the simple to the complex, we can handle any type of exchange.
  • Does 1031 Pros handle exchanges in any state?
    Yes. We can handle exchanges for any property in any of the 50 states.
  • How much notice do I need to do a 1031 Exchange?
    You can do a 1031 exchange any time before closing on the sale of your investment property. Like we said before, we're fast.
  • How long do I need to own my investment property before I can exchange it for another?
    There is no set timeline, but to avoid any issues you should at least own it for a minimum of 12 months.
  • What happens if I don't close on my replacement property within 180 days?
    Then you just pay the capital gain taxes like your would have if you were to sell the property in the first place.
  • Can I sell one property and exchange into multiple properties?
    Yes, in most cases you can exchange into three other properties.
  • Why should I use a qualified 1031 intermediary to do my exchange?
    We will prepare all the correct paperwork you will need to file your taxes with. We will also ensure you meet your timelines and any other specifics of the 1031 tax code.
  • What if my Title company is a qualified 1031 intermediary?
    1031 Pros specializes in exchanges and has the expertise, experience and history to ensure an audit free exchange.
  • What is a reverse exchange?
    A reverse exchange is when you close on the purchase of the replacement property before you close on the sale of the relinquished property. Many real estate investors will utilize a reverse exchange to acquire a replacement property in a market where there may be competing offers or there is a need to close fast. Because of our vast experience handling these types of exchanges, we offer very competitive rates and are willing to match any competitor pricing.
  • What is an improvement exchange?
    Also referred to as a construction exchange or build-to-suit exchange, improvement exchanges offer real estate investors nice benefits, which often result in better investment opportunities than properties readily available on the market. The ability to remodel, add capital improvements, or build from the ground up, while using tax-deferred dollars, allows an investor to reinvest in a replacement property that meets their exact investment criteria.
  • What is the Federation of Exchange Accommodators?
    The Federation of Exchange Accommodators (FEA) is the only national trade association organized to represent professionals who conduct like-kind exchanges under Internal Revenue Code §1031. Members include Qualified Intermediaries (QIs), their primary tax and legal counsel, and affiliated industries (TIC sponsors, banks, real estate brokers, title companies, settlement/escrow agents, etc.). 1031 Pros is a proud member of the FEA.
  • Can I 1031 exchange into a Tenancy in Common or Triple Net Lease Property?
    Yes, you can exchange into a Tenant In Common (TIC) or Triple Net Lease real estate investments. The biggest rule of thumb is that your name is on the title as an owner with a percentage of ownership. These types of real estate investments offer a great passive income for those who are done with being a landlord and are ready to sit back and collect a monthly check. We do not offer these types of investments at 1031 Pros, but we have some great partners who do. Call us today to learn more.
  • Does my personal residence qualify for a 1031 exchange?
    No, it does not. Personal residences qualify for different tax benefits under IRS Code Section 121. Section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale. 1031 Pros does not offer any services or tax advice for personal residences. Please contact our trusted Accounting partners under the "More Tab" for more information on Section 121. Tell them 1031 Pros sent you!
  • Are my funds insured?
    Each of our exchanges uses a unique, individual, FDIC insured account. 1031 Pros also has additional bonding and insurance, so your funds are always safe and secure.

Have More Questions? Send Us a Message.

bottom of page