changing intent

Dear 1031x:  I have lived in my primary residence in CA for 22 yrs.  I took  $130,000 of equity out to purchase some land in MT for the purpose of  living there. Circumstances have changed and I cannot move there for a  while.  If we build a house and sell it, and purchase 2 separate parcels  of land with the profit, will we receive any tax breaks...or do we have to  purchase a single family home like we sold?  I have owned the property for  6 mos. The house could be ready by Oct. or we could work on it during the  winter and have it ready in April or May. Does that make me a dealer or  investor?  What are my tax ramifications? Thank you, J

Dear J:  There is no easy answer to your question.  You bought the land with the intent of moving there.  Now your use has changed to either investor or developer. Certainly if you resold the land without development you could 1031 exchange to defer tax on any gain.  If you build and  then sell the gain could well be treated as ordinary income as your intent is to immediately resell the new house.  On the other hand, because you are  not really a professional developer, and this is your first effort,  you could probably report this as a 1031x.  What I am saying is that there is tax risk in building, selling and 1031 exchanging, and there is no way around the tax risk.  Actually, there is a way around it, but you would have to hold the new home for investment, and probably rent it out for about one year, before your put it on the market.  The you could get 1031 treatment.  The biggest thing for you to consider is the gain you could achieve by building the new house in MT.  If there is really a lot of profit in doing so then you should go for it and accept the tax consequences.  On the other hand, if there is not a lot of gain to be had, you should just resell the land.  I hope this helps.

Steve Hickox
Attorney / President

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