Can I buy land in a 1031 and build a rental later with my own funds?

Land qualifies, and your own post-closing construction is simply a capital improvement

Reg. section 1.1031(a)-1(c) gives exchanging improved real estate for unimproved real estate as an example of a like-kind exchange, and Publication 544 says the same of improved and unimproved property.

Once the deed is yours, what you build with outside money is your business. It is added to your basis and depreciated as a separate asset, as explained in renovating or adding value after closing.

Hold the land for rental or investment. Section 1031(a)(2) excludes real property held primarily for sale, so a plan to build and sell units would undercut the exchange.

Exchange money stops working the day you take title to the lot

Reg. section 1.1031(k)-1(e)(4) says additional production after you receive the replacement is not receipt of like-kind property. Money the intermediary still holds cannot be sent to your builder later without becoming boot.

The reinvestment test is therefore measured on the lot price. Full deferral needs the land to be worth at least your net sale price, with all proceeds used and any paid-off debt replaced at the land closing; see reinvest the whole sale price or the gain.

Leftover cash does not come back to you right away either. The intermediary agreement must bar you from the money until the exchange ends, so a balance you hoped to spend on foundations stays frozen until the regulations allow its release, usually after day 180, and is then taxed as boot for the year of sale.

Debt offsets only liabilities you take on as part of the acquisition under Reg. section 1.1031(d)-2. A construction loan signed months later does not replace the mortgage you paid off on the sale.

Worked example: a $700,000 sale into a $250,000 lot

Hypothetical, round figures. You sold a rental for $700,000 net with no mortgage. Your adjusted basis was $400,000, so the gain is $300,000, of which $100,000 is depreciation.

You buy a $250,000 lot and plan to build a $500,000 fourplex with your own savings and a construction loan. The intermediary is left holding $450,000, which is boot. Recognized gain is the smaller of $450,000 and $300,000, so all $300,000 is taxed, starting with the $100,000 at up to 25% under Topic 409.

Add a second identified property, such as a $450,000 interest in a Delaware Statutory Trust, and nothing is taxed. You then build on the lot with money from outside the exchange. Run your own numbers with your CPA.

• Lot alone at $250,000: $300,000 recognized, nothing deferred.
• Lot plus $450,000 of other identified real estate: $0 recognized.
• Lot priced at $700,000 or more: $0 recognized without a second property.

Your carried-over basis lands on land, which cannot be depreciated

Publication 527 says you cannot depreciate land. Basis carried from a depreciated building into a lot stops producing deductions until you sell.

Identify the lot by legal description or address within 45 days, as Reg. section 1.1031(k)-1(c) requires. Keep your building plans, permit applications and rental projections in the file, since they are the evidence that you are holding the land to rent rather than to sell.

The new building starts its own 27.5-year schedule from its construction cost. Compare that with exchanging into an existing building, where the carried basis keeps depreciating; depreciating replacement property shows how carryover basis is handled.

If you want exchange money in the building, it has to be built before you take title

An exchange accommodation titleholder can hold the land and build with exchange funds for up to 180 days under Rev. Proc. 2000-37, then deed you the land and whatever is finished. The planning is in the improvement exchange guide.

That is not available for land you already own; Rev. Proc. 2004-51 withdrew the safe harbor for property you owned in the 180 days before it reaches the titleholder. See building on land you already own.

Where the lot is the only thing you want to buy directly, a trust interest can absorb the rest. Rev. Rul. 2004-86 treats it as real property, and it can be sized to the gap, though it is illiquid and carries fees and property risk; see traditional DSTs.