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Roll Your Capital Gains into New Construction
1031 ON YOUR OWN TIME
We have come up with a program that allows for real estate investors to roll their real estate capital gains into new construction and comply with the 1031 tax deferral program.
The Process
1. You identify the property you want:
Alchemist’s clients can control a 1031 replacement property years before they actually sell an investment. Instead of having to settle paying top dollar to compete with other investors for limited supply, you can have time on your side, and the potential to achieve extraordinary yields by investing in a location you want, at cost.
2. The client enters into a purchase contract with Alchemist:
As an unrelated party, Alchemist can acquire a target site and assign to you the rights for future ownership through a purchase and sale agreement which coincides to when you sell your investment property. Alchemist will form a special purpose entity which will be used solely for the ownership of the target property. The contracts between you and Alchemist will be entered into prior to Alchemist acquiring the target property and becomes void if the property is not acquired.
3. You finance the site acquisition:
Land sites of like-kind properties are typically 25% or less than the value of the total investment. Once a target property acquisition is negotiated for purchase, funding will be required for the deposit and acquisition. The funding for the acquisitions will be provided by you through either their access cash or through refinancing an investment property. That cash is then loaned to the special purpose entity you control through Alchemist in order to acquire and permit the target property. The loan is collateralized by the target property itself. Around this time, comprehensive due diligence will be conducted on the property necessary for the future design and cost estimating of the project. This stage culminates in a binding construction contract, conditional to land use, permitting, and the sale of your original 1031 qualifying investment property.
4. The target property is aquired using the special purpose vehicle:
The special purpose entity controlled by you through contracts with Alchemist acquires the target site.
5. Alchemist designs and permits target property:
Alchemist’s internal and consulting architects design to the client’s vision, subject to findings of the due diligence. The client can choose to provide general direction or to be actively involved in the design stage. Alchemists can work off of general parameters such as product type, quality of finishes, and financial objectives in the design of the future investment property. Alchemists can also assist with financial modeling throughout the design process. The culmination of this stage will be a permissible set of plans and a binding construction agreement, subject to cost, schedule, and scope changes from the local government. The plans will be submitted to the local land-use authority and permitting departments.
6. The client sells investment property:
Alchemist’s internal and consulting architects design to your vision, subject to physical and regulatory conditions. Alchemist can work off of general parameters such as product type, quality of finishes, and financial objectives in the design of the future investment property. Alchemist can also assist with financial modeling throughout the design process. The culmination of this stage will be a permittable set of plans and a binding construction agreement, subject to cost, schedule, and scope changes from the local government.
7. Take title to your new property:
When the certificate of occupancy can be secured within 180 days, the target property’s title will be transferred to the client at the original cost. Any appreciation in land value since the beginning of the process will be passed through to the client’s benefit. Any adjustments to the contracted construction amount due to inflation and materials availability will be made at this time. With the proceeds of the sale of the client’s investment property and any equity within the land, the client may have sufficient funding for the construction of their future income-producing investment property.
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*Alchemist Homes does not offer tax advice. Always consult with a tax professional.
8. Alchemist begins construction:
Alchemist will then begin construction of the future investment property with a scheduled completion within the 180-day time limit of the 1031 tax deferral process. You will receive regular updates and communication on demand through Alchemist’s mobile app, project portal, and scheduled meetings.
9. Fulfill the 1031 exchange requirements:
The certificate of occupancy is completed within the 180 day period and tenants may move into the client’s new investment property. At the completion of the process, the client is able to:
-Roll their capital into a new investment at cost, instead of at a frothy, competitive, market-driven price of another income-producing real estate.
-Plan their 1031 exchange years in advance as well, rather than under the high-pressure environment of the limiting 180-day window. And they can now own an investment property driven by their own vision.
-Achieve potentially greater returns than acquiring a marketed income-producing property.