FHA 90 days rule, how it exactly count and more

7 Replies

Hello,

I have a house I bought in March 22nd and rented it as lease to purchase. Now the tenant want to buy it with FHA loan. What is exactly the earliest closing date for house can be sold.

Is it can be closed on 6/21 or on 6/21 the buyer can apply the loan.   The house is remodeled by an flipper on last December.  The flipper bought the house at 80s and I bought at 130s, and now my tenant will buy it at 170s. I am worrying about the appraisal may not be that high as I only bought a new refrigerator.

I am also plan to do 1031 exchange on this. Should I postpone the closing date to make sure the closing can be done on time? my tenant want the house to be on their names asap. There are a lots of fees for 1031 exchange.

What's your thought here.  My lender recommend to sell it after 1 year.

Thanks,

Andy

I don't know about the FHA 90-day rule, but you might have a problem selling this property under the Section 1031 Like Kind Exchange rules. You have already entered into a contract to sell the property, and apparently you did this shortly after acquiring it. Therefore, the property was never investment real estate, but was "inventory" available for sale, and is not covered by the provisions of Section 1031.

Section 1031 is not a card you pull out and use, it is part of your overall wealth strategy, specifically deferring taxes on your capital gains, and it spans at least a two-year period, one year before you sell the Relinquished Property and one year after you acquire the Replacement Property while you are qualifying each as being held for investment.

I hope this helps.  Let me know if you have a follow-up.

Michael.

We just went through this and luckily enough we only had to wait 30 days from the time "title" was transferred to the seller. I believe you can start the loan process before the 90 days but I would ask the mortgage broker and/or bank you are working with. 

Promotion
Apartments.com
List, Screen, Lease, Get Paid, Manage.
No Better Place to Lease Your Place
Owners rely on the #1 rental site to get the best results from their rental properties.
Get Started Now

Hey Andy,

Well, in regard to your concern with the high 1031 exchange fees and your question of whether or not to go that route, have you seen a comparison between the tax implications of NOT doing the exchange vs. the fees associated with doing one?

If you haven't, I'd recommend speaking with your tax guy and have him work it out for you. Should put the whole issue to bed fairly quickly. 

Originally posted by @Andy Wu :

Hello,

I have a house I bought in March 22nd and rented it as lease to purchase. Now the tenant want to buy it with FHA loan. What is exactly the earliest closing date for house can be sold.

Is it can be closed on 6/21 or on 6/21 the buyer can apply the loan.   The house is remodeled by an flipper on last December.  The flipper bought the house at 80s and I bought at 130s, and now my tenant will buy it at 170s. I am worrying about the appraisal may not be that high as I only bought a new refrigerator.

I am also plan to do 1031 exchange on this. Should I postpone the closing date to make sure the closing can be done on time? my tenant want the house to be on their names asap. There are a lots of fees for 1031 exchange.

What's your thought here.  My lender recommend to sell it after 1 year.

Thanks,

Andy

Hi Andy,

You need to be careful with your documentation here for the 1031 Exchange.  The critical issue for a 1031 Exchange is that you have the INTENT to hold for rental, investment or business use.  You bought this on March 22nd, leased it after you rehabbed it, and are already selling it.  An auditor may try to argue that you did not have the intent to hold for rental purposes.  Emails, letters, notes to the file, etc., between you and your advisors would be critical in demonstrating your intent to hold for rental instead of sale.  The fact that the tenant exercised their option much quicker than you thought/planned is part of the explanation of your intent.  Discuss the documentation and reporting with your tax advisor.

Originally posted by @Bill Exeter :
Originally posted by @Andy Wu:

Hello,

I have a house I bought in March 22nd and rented it as lease to purchase. Now the tenant want to buy it with FHA loan. What is exactly the earliest closing date for house can be sold.

Is it can be closed on 6/21 or on 6/21 the buyer can apply the loan.   The house is remodeled by an flipper on last December.  The flipper bought the house at 80s and I bought at 130s, and now my tenant will buy it at 170s. I am worrying about the appraisal may not be that high as I only bought a new refrigerator.

I am also plan to do 1031 exchange on this. Should I postpone the closing date to make sure the closing can be done on time? my tenant want the house to be on their names asap. There are a lots of fees for 1031 exchange.

What's your thought here.  My lender recommend to sell it after 1 year.

Thanks,

Andy

Hi Andy,

You need to be careful with your documentation here for the 1031 Exchange.  The critical issue for a 1031 Exchange is that you have the INTENT to hold for rental, investment or business use.  You bought this on March 22nd, leased it after you rehabbed it, and are already selling it.  An auditor may try to argue that you did not have the intent to hold for rental purposes.  Emails, letters, notes to the file, etc., between you and your advisors would be critical in demonstrating your intent to hold for rental instead of sale.  The fact that the tenant exercised their option much quicker than you thought/planned is part of the explanation of your intent.  Discuss the documentation and reporting with your tax advisor.

 Thank you Bill.  I have several other rental properties. I never sell any of them till this one The lease to purchase contract is valid for 2 years. That's my original plan.

Originally posted by @Kevin Fox :

Hey Andy,

Well, in regard to your concern with the high 1031 exchange fees and your question of whether or not to go that route, have you seen a comparison between the tax implications of NOT doing the exchange vs. the fees associated with doing one?

If you haven't, I'd recommend speaking with your tax guy and have him work it out for you. Should put the whole issue to bed fairly quickly. 

My attorney told me the fees is about $1000 for him. I am  not sure that the all the fee. The tax benefit  will be about $6000. 

Originally posted by @Andy Wu :
Originally posted by @Bill Exeter:

 Thank you Bill.  I have several other rental properties. I never sell any of them till this one The lease to purchase contract is valid for 2 years. That's my original plan.

Excellent!  Your track record will go a long way in demonstrating your intent to hold for rental purposes but that your tenant elected to exercise their option early.