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1031 Exchange for New Construction Explained

With careful planning and expert guidance, savvy investors can use a 1031 Exchange to defer their capital gains taxes despite purchasing new construction. While IRS guidelines forbid using funds from an exchange for building projects, this creative maneuver allows investors significant flexibility in directing assets towards various investments. Let’s take a closer look at 1031 exchange for new construction and why they could benefit your investments. 

new construction 1031 exchange

Can 1031 Exchange Funds Be Used For New Construction?

Yes, 1031 Exchange Funds can be used for new construction. However, many restrictions need to be considered before embarking on this strategy.

Generally speaking, the IRS stipulates that the new construction must be “substantially in place” and existing for investment or business purposes within 180 days of the property transfer in the 1031 exchange. The funds must also be held in a Qualified Intermediary account until they are ready to be used for the new construction project.

It’s important to consider all these factors and keep detailed records throughout the process, as any misstep could have serious tax implications.

1031 exchange new construction

How Does a Construction 1031 Exchange Work?

The process of a construction 1031 exchange is fairly simple, but it must be handled with precision.

If the property investor is looking to defer capital gains taxes, they must hire an experienced Qualified Intermediary (QI) who can properly facilitate the exchange under IRS guidelines.

From there, the exchange must be completed according to the following timeline:

– The investor must identify a “replacement property” within 45 days of selling their original property.

– The investor must complete the purchase of the new construction project within 180 days.

– The funds used for purchasing the new construction must be kept in a Qualified Intermediary account until they are ready to be used for the new construction project.

– The investor can then complete the exchange and defer their capital gains taxes by reinvesting all of the proceeds from the sale into the acquisition of the replacement property.

It’s important to cover all your bases when engaging in a 1031 exchange for new construction and ensure that you follow IRS regulations. With thorough planning and expert guidance, investors can take advantage of this powerful investment strategy while deferring capital gains taxes.

can 1031 exchange be used for new construction

Forward/Reverse Construction 1031 Exchanges

In addition to traditional 1031 exchanges for new construction, investors may consider forward or reverse construction 1031 exchanges.

A forward construction exchange allows the investor to purchase the replacement property before selling their original relinquished property. The funds must be held in a Qualified Intermediary account until they are ready to be used for the new construction project.

A reverse construction exchange is the opposite. The investor would first sell their original property, place the proceeds into a Qualified Intermediary account and then purchase the replacement property within 180 days.

Both exchanges are viable options for investors who wish to defer capital gains taxes when purchasing new construction.

Conclusion

1031 exchanges for new construction can be a powerful tax deferral strategy for investors looking to reinvest their profits into an investment property. By taking advantage of this exchange, investors can enjoy significant tax savings while still growing their portfolios. That said, it’s important to work with a qualified professional who can help ensure that you are properly adhering to IRS regulations.

Interested in Learning More

Point Acquisitions is the leading advisory and provider of 1031 exchange services for investors. Our experts are dedicated to walking you through every step of the 1031 process, ensuring all guidelines laid out by IRS regulations are met. Discover how a new construction 1031 exchange could be a beneficial investment today!

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