1031 Exchange Question
I have tried searching through past posts, but I wasn't able to find a good answer for this question.
If I buy a house for 110,000 and sell it for 130,000 and do a 1031 exchange instead of a regular sale in theory i can buy a house for 130,000 keeping my orginal loan of 110,000 in tact?
My quesiton is can I do a 1031 and build a brand new house or does the house have to have been already built?
How long do you have to do the exchange does this vary from state to state or is this a federal law?
Here's what I know:
. Be aware that doing the exchange only defers taxes, and when you sell the property (if you don't do another exchange), you will be taxed on capital gains for both sales (increase of value from initial investment the 110K to eventual value once sold).
1031 exchange is based on Starker v. United States, and is governed by federal law, and the timing is the same regardless of the state. Basically, you have to id a replacement property (you can name up to 3, and you can invest in up to all 3 to spread out the funds) within 45 days of closing and transfer of relinquished property. Then the replacement property (or properties) must be received (title acquired) within 180 days of closing and transfer of relinquished property or due date with extensions for the transferor's tax returns for the taxable year in which the transfer occurs.
: My quesiton is can I do a 1031 and build a brand new house or does the house have to have been already built?
I'm presuming this is for an investment property, as 1031 doesn't work for personal households.
-Yes, you can build a new house, the proceeds from the exchange can be used for purchasing a lot (or up to three), however, I don't know if the proceeds can be used for a construction loan. In the alternative, a reverse exchange can be done for build to suit investments, ie, buy lot, build home, then sell other property and do exchange.
As far as leaving the original loan in place, I don't think it's possible, but I don't know for sure. The most important rule is that no money can be recieved by transforer during exchange (called "boot"
Also, make sure you use a qualified intermediary (to hold funds during transfer). Consult with an attorney that knows these deals, b/c though not that complicated, any mistakes can lose any benefit of the exchange.
Best of luck,
Beckie
Great summary rcastel!
The only way you could keep your existing loan is if the lender was willing to substitute collaterral (i.e. reconvey the original lien against the relinquished property so that you can sell and close, and then record a new lien against your replacement property).
You can do a build-to-suit or improvement 1031 exchange, but it gets complicated. You have 180 days to complete what you can and that is not easy. There are a lot of little issue to be aware of, so call me if you would like to discuss.
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