1031 exchange and development

Dear 1031x: If you sell an apartment building to do a 1031exchange into another apartment building of like or greater value and then two years later develop it into
condominiums or tear it down and develop it.  Do you then have to pay taxes?

Dear D:  The IRS treats investment activity very differently than development activity.  Investment activity is subject to capital gains tax (15%) and is 1031x eligible.  Developement activity is subject to ordinary income tax either personal or business (35%).  It is also sometimes subject to self employment tax and if performed by a corporation is subject to corporate tax.  If you go forward with your plan you need to separate the two activities.  Make sure that you hold the apartment buildings for investment.  When you are ready, form a separate developement company which your investment company then allows to develope the property.  The value of the property, prior to development, is determined, preferably by appraisal. The investment company needs to keep its identity and investment activity separate.  Then when the property is redeveloped and sold the development company reports its profits as ordinary income while the investment company reports its gain as capital gain.  I hope this helps.