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Author: Rick Halperin
The 1031 exchange and preconstruction contracts – these have two of the more popular tools used by real estate investors in recent years. The question is the same one asked by Reese’s when it looked at peanut butter and chocolate – are they two great things that are better together?
The
First, as with all 1031 exchanges, the same common-sense rules apply to transactions involving preconstruction contracts as with all other potential real estate transactions. Specifically this means: holding the contract to be sold for at least one year, using a qualified intermediary to handle the details, applying all the initial contract proceeds toward the replacement contract purchase, and purchasing or entering into replacement contracts of at least as much value as the sold contracts.
Beyond these basics, investors should enter into potential 1031 exchanges with preconstruction contracts with even more caution for several reasons. Let’s use the most common example: a condominium preconstruction contract. In this instance, investors need to bear in mind that the condominium developer's approval generally is required in order to sell a preconstruction contract. And, as a condition of approval, many developers require a share of the sale's profits. In addition, many lenders and financial institutions frown upon on numerous assignment contracts and prefer to see actual contract buyers.
The conservative and safe approach to using a 1031
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