|
|
|
 Developers generally do not enjoy the benefits of Section 1031. Why? Because 1031 is applicable to taxpayers that hold their real estate primarily for investment purposes, not for taxpayers that sell inventory held for resale. Thus, when a developer buys a piece of property for the purposes of dividing it up and selling the newly created inventory, he has not met the investment intent test of 1031.
When a developer sells his real estate, not only does he fail to qualify for 1031, but he must also pay taxes on the gain at the higher ordinary income rates (up to 35% to the IRS, plus state income taxes).
Can developers ever find tax relief under 1031?
Yes, in the following three examples:
-
Developing for the purpose of investment. If a developer develops land, constructs a building, and leases it out for a period, he has now passed the investment intent test and can do a 1031 exchange when he sells the property.
-
Original plan becomes unfeasible. In a 1966 Supreme Court case, the argument was made that if property is acquired for rental or other investment purposes, but then the taxpayer develops and sells the property, then he holds the property primarily for sale to customers in the ordinary course of his trade or business, thus not qualifying for 1031. But the Supreme Court rejected this argument and stated that if the chief purpose was for investment purposes, and if this original plan becomes unfeasible, then the taxpayer can realize gain in any way he can, thus maintaining capital gain and 1031 treatment.
-
Selling the property to a different entity. It may be possible for a taxpayer to sell his real estate to a related development company at a profit and do an exchange. The development company then develops the property and reports a reduced gain on its sales (reduced due to the transfer price from the investment entity to the development entity). For this strategy to work, the investment entity should not own more than 50% of the development entity. Additionally, the investment entity should not have a history of being a developer.
Summit regularly assists developers in understanding and working through these complex issues. If you would like assistance in structuring an exchange, please contact us at 1-800-909-1031 or info@summit1031.com.
Brad Jorgensen, President of Summit 1031 Exchange in Utah, has over 25 years of real estate experience specializing in 1031 exchanges. He is a certified Continuing Education instructor for Real Estate, Title, Mortgage & CPA industries in Utah. Contact Brad at 1.800.445.6630 or bradjorg@summit1031.com
read Brad's bio
|
 |
|
|
|
|
|