Can an owner 1031 exchange a contract for deed?

4 Replies

Probably an ignorant sounding question:

Can a property owner 1031 exchange out of a contract for deed once the contract is fulfilled?

I'm talking about buying to The Owner of an apartment building who owns it free and clear and is afraid to sell outright without doing a 1031 into something else. The real fear is paying taxes...I'm trying to work out a contract for deed with them, which would somewhat lower my need for a large down payment. Could they 1031 out of the CD when I refinance and buy them out of the CD?

Thank you!

I am not sure I understand exactly what you are asking but if you want to send me a more detailed email or call me today as I am available at 866-570-1031, I would be happy to answer and then come back and answer in the forum so we can all benefit.  Having said that, when you say "if a contract is already fulfilled" , do you mean the seller has already closed and received its proceeds?  If thag is the case it is too late but if that is not the case, then I need to fully understand the facts either via email or phone call and then I can come back and post a consice and accurate answer in the forum so everyone benefits.

@Justin Hennig ,  In what you're describing there is another element that weighs in rather than the actual deed transfer.  the legal concept is "risk of loss".  Once the risk of loss has passed substantially the seller has in essence completed their sale and is no longer eligible for a 1031 exchange whether or not deed has actually passed.  A simple option to purchase a piece of property is usually not deemed to pass the risk of loss thresh hold.  A land contract is usually seen as crossing over.  I can see at least 3 options that are worth exploring for you in this instance.

1. You may want to think about an option and master lease concept with them.  Then when you exercise the option and purchase they could 1031.

2. The other thing that might be helpful is to have them explore the tax ramifications of a note sale.  Although they will pay tax on all gain it will be spread out, thus lessening the blow to them.

3. If they are in a strong cash position they could simply sell outright to you now and carry a note back that they put into their exchange and then replace with cash.  There are ways we can accomplish this so you get the advantages of a significant owner-carry. And they get to sell their property now, enjoy note income with tax only on the interest, and complete a 1031 exchange deferring all tax on their sale.

That should get you started. Happy Tuesday.

The 1031 has a timing clause of closing on or before 180 days of selling or buying (which ever happened first).  Performing a Concurrent Closing greatly reduces the risk and stress of the exchange.  IMO, I would not get a third party or instrument into the exchange - - you don't need the complication.

@Justin Hennig , The above statement is incorrect on several levels. There is no such thing as an "either way" 180 day period. The statutory order of a 1031 exchange is sell followed by purchase. And there are several very critical criteria that have to be met.  

I'm not sure what motivation the poster had in encouraging you to attempt a simultaneous exchange without sufficient knowledge of the law or at least encouraging you to have professional representation but it's bad advice.   

Follow the advice to "do your own" at your own peril.