1031 exchange on my property that is in a lease option to buy

3 Replies

Is it possible to do a 1031 exchange on a property that sits in the lease option, where I would take title and then immediately sell to sub-tenant.

I have a building that we began renting in 1992 and had a lease option to purchase.  It was a 5yr lease  with (3) 5 year extensions that we exercised.  We then extended lease in 2012 for additional 2 years and adjusted the option price, we brought that price down to $98,000 and got another 10 year extension with a $1 buyout.    

We have be sub-letting the building for over 10 years now, and the current tenant has a purchase option which they are looking to exercise.  The question is if we exercise our option to purchase, take title and immediately sell, can we do a 1031 exchange into new investment property?

The terms of your lease option almost make it sound like a land contract if your ultimate purchase price is just $1. It could look to the IRS as though your rights are so great it is as if you already own the property - enough "benefits and burdens" of ownership have shifted to you that you might be able to be viewed as the taxpayer for that property. Even though you don't technically own the property the payments you have been making over the years and the renewals could have passed the bar of "risk of loss passing". Like a boat that gets a board replaced each year, when does it become a new boat?

If that is the case and your cpa agrees then you are the taxpayer and could conceivably do a 1031 on it right now. I'd still counsel a quiet title transfer to make the deed match as closely as possible to avoid questions. That would be a case of making the deed match reality.

Thank you Dave Foster.  I was thinking I might qualify under 55-540 and your comments further support this idea.  I was hoping a lease-option purchase into a 1031 was a common situation, but I cannot find much discussion about it.  

@Jason Norberto 5-540 was an oldie but a goodie.  Most discussion (what there is) on 1031 is going to be centered on determining taxpayer for a property.  So risk of loss, burdens and benefits, and the discussion in 55-540 are all key components.  With so few opportunities to test, even case law doesn't really give great answers.