Can I buy new construction or a property still being built as my replacement?

The regulation lets you name a house that does not exist on day 45

Buying something still under construction is expressly permitted. Reg. §1.1031(k)-1(e)(1) says a deferred exchange “will not fail to qualify for nonrecognition of gain or loss under section 1031 merely because the replacement property is not in existence or is being produced at the time the property is identified as replacement property.”

“Produced” carries the meaning it has in section 263A(g)(1), so site work, framing and finish work all count. The builder does not have to have broken ground by the time your notice goes in.

What the paragraph does not do is move the finish line. Your exchange period still ends at midnight on the earlier of the 180th day or your return due date including extensions, and a construction delay is not a ground for relief (no extension exists).

Describe the lot the way the county does, then attach whatever plans you have

The identification names the land first. The regulation’s own formula: the description is adequate “if a legal description is provided for the underlying land and as much detail is provided regarding construction of the improvements as is practicable at the time the identification is made.”

For the 200 percent ceiling you count the finished value, not the dirt. Paragraph (e)(2)(ii) uses “the estimated fair market value as of the date it is expected to be received by the taxpayer.” Hypothetical: you sell for $900,000 and name a $200,000 lot that will deliver as a $700,000 house — the $700,000 is the figure charged against your $1,800,000 ceiling.

Put the plan name, elevation, lot and phase in the notice. Redesigns are risky, because “if substantial changes are made in the property to be produced, the replacement property received will not be considered to be substantially the same property as identified.” The mechanics of sending the notice are on how to identify replacement property.

At delivery you are credited only with what local law calls real property

One sentence decides the money. Property under production is substantially the same as identified “only to the extent the property received constitutes real property under local law” (Reg. §1.1031(k)-1(e)(3)(iii)).

The regulation runs its own arithmetic. In its example, construction is 20 percent complete on the last day of the exchange period, and “under local law, property M constitutes real property to the extent of the underlying land and the 20 percent of the construction that is completed.” The unbuilt 80 percent is not like-kind at all.

Hypothetical, round numbers: $600,000 of proceeds, a $150,000 lot, and a house that is framed and dried in when the deed records. If land plus completed improvements appraise at $420,000, the $180,000 still sitting with your intermediary is boot and is taxed in the year of the sale.

Everything the builder finishes after you take title is wasted on the exchange

Paragraph (e)(4) is blunt: “any additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of a like kind.”

The same paragraph closes the other door: “the transfer of relinquished property is not within the provisions of section 1031(a) if the relinquished property is transferred in exchange for services (including production services).” You cannot hand the builder exchange money for work still to come and call the payment real property.

So the term to negotiate is a hard delivery date inside the exchange period with the certificate of occupancy already issued, not a punch list running into next spring. Spending exchange dollars on construction you control is a different structure; see improvement and build-to-suit exchanges and repairs after you take title.

A builder contract is not real property, but a recorded option is

If the plan is to hold or flip the purchase contract rather than close, stop. The real property regulation lists “choses in action” among the intangibles that “are not real property for purposes of section 1031,” whatever state law calls them (Reg. §1.1031(a)-3(a)(5)). A contractual right to receive a deed is exactly that.

The same list runs the other way for options: “an option to acquire real property” is named as an intangible that is real property. That distinction matters if a developer can offer a recorded option on a completed unit instead of a reservation agreement.

Either way the exchange has to end with a recorded deed inside the exchange period. Pre-construction condominium contracts typically close only once the certificate of occupancy is issued, which is the single date to pin down before you sign (Asset Preservation).

Deposits, upgrade allowances and the addendum your builder has not seen

Builders take deposits months before an exchange exists. A deposit you paid out of your own pocket before the sale closed is not exchange money, and reimbursing yourself from the exchange account at closing is the item to put in front of your CPA first (who should hold the deposit).

Your intermediary has to be inside the purchase agreement. Either it “enters into an agreement with the owner of the replacement property” itself, or you assign your rights and “all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer” (Reg. §1.1031(k)-1(g)(4)(iv)(C) and (g)(4)(v)). Most production builders will sign a short addendum (cooperation clause).

Design-centre upgrades that stay with the house are improvements; the refrigerator, the blinds and the patio furniture are not (furniture and personal property). Confirm all of this with your own CPA or attorney before you sign the builder’s paperwork.

• Ask for the certificate of occupancy date in writing, not the “estimated completion” date.
• Get the exchange and assignment language into the purchase agreement itself, not a side letter.
• Have the builder split the price between real property and appliances, blinds and loose items.
• Keep a second replacement on your list that you can close in days if the build slips.