1031 exchange and Lease option

11 Replies

When You do a lease option/sanwich lease you simultaneously "buy and flip" you sell your option and let your subtenant exercise it directly from owner, right? But, if I wanted to do a 1031 exchange to buy another property with the profits.. How could I do that if im not the owner?

The simple answer is, you can’t. In order to do a 1031 exchange, it has to be an exchange of like property. You have to own the asset you are trading. Once the properties are traded, the depreciation base is recalculated which defers the capital gains taxes but does not eliminate them. 

@Account Closed , The 1031 has to be a sale of investment property followed by a purchase of investment property using the process of course.  So if you never take title to investment property you have nothing to do a 1031 with.

The second issue would be if you did exercise you option and take title what was your intent in taking title?  The 1031 is only valid for real estate . you purchase with the intent of holding for productive use.  If you take title and immediately flip that would not qualify for 1031.

Unless - your attorney or accountant decided that your period of leasing with the option offered you enough of the benefits and burdens of ownership that "risk of loss" had passed and you owned the property even though you were not on deed.   In that even exercising the option and flipping might be OK.  Dicey though.

@Dave Foster can I get the property's deed to do a 1031 exchange without paying closing costs? ( the seller's name will still be on the mortgage ) and I will sell the house after 1yr.

@Account Closed , maybe someone's got an idea for you.  But I don't see how you can take title without paying the costs of taking title.  and I really don't see how the seller can keep his mortgage if you take title from him.  

But if you take title to the property and after a year want to 1031 then absolutely you can.  You've demonstrated your intent to hold the property for productive use.

@Dave Foster please Dave watch this video for a few seconds. Here is where an attorney talks about getting the deed. https://youtu.be/kwCNbbgRzmI ( minute 10:20 ) he says " ask for the deed " he also talks about doing a 1031 exchange. That's what i dont understand but thats what I want to do

@Account Closed , You have to open up an escrow and get the seller to give you a deed to be held in escrow for however long.  Meanwhile you find some tenant who wants to buy the property but can't afford it so they pay you over market rent so you profit.  And they pay money to you for an option.  And you have to give the seller some kind of consideration in exchange for a deed in escrow.  Somehow I've got to think you've got a few more costs than just closing which someones got to pay?

But the question was about 1031.  Does having a deed in escrow really mean that you own the property the entire time so that when the deed is finally recorded you can do a 1031 as he says and get capital gains treatment?  He's the attorney.  If he says so and is willing to defend it then sure!  Back to what I said a long time ago in this forum.  It comes down to the doctrine of risk of loss passing.  This guy thinks it passes when the deed goes into escrow.  Others might think risk of loss passes with the recording of the deed.

The problem is you've got to have a lot of zeros in a transaction before it actually is cost effective to appeal an IRS decision.