Advice Needed: Selling Single Family Occupied by Tenants

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Advice Needed: Selling Single Family Occupied by Tenants

Glenn Clapp
Investor · Sandy, UT · Member since 2016 · 17 posts · 10 votes

I have put in offers on two properties to 1031 exchange with the sale of my occupied single-family property. I have a sale clause in the lease and have asked the tenants to vacate before I list the property. The tenants expressed an interest in buying the property. They have asked if I would be interested in seller financing.

I am open to most any creative ideas that gets everyone what they want. For me, I want the cash out for the down payments on other properties plus rehab and I want a 1031 exchange to defer capital gains.

I would like to hear some recommendations form those far more experienced than I on what options would be best to consider and structure.

If I do seller financing, I would expect a down payment of some realistic amount, but if I do that, can I also refinance to pull out the cash I need for a down payment? What would that mean for a 1031?

If i do a lease option and refinance, I expect a 1031 would be deferred until I sell the property if the tenants exercise the option in say, 2-3 years, and that may be OK, but I may not be desiring to do a new purchase at that specific time and would then risk having to pay capital gains.

What other options might I have? What might work best for both? Right now, the single family rental is 100% paid off with no debt of any kind. 

Thanks,


Glenn

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Account Closed
1031 Exchange Qualified Intermediary · Bend, OR · Member since 2015 · 44 posts · 10 votes
9y

Why do they need to move out before you list it?  You might find a buyer (investor) that wishes to have them stay - and they can perhaps sell the property to the tenants.  Or your tenants might decide to get their own financing and make you an offer.  More importantly, you can move on to the two properties that you have put in offers on and accomplish your goals with that equity you have tied up.   

To do a 1031 exchange, the lining up of the timing can be tricky.  The more simplified it can be the better.  You might reach out to a couple of QIs and decide who you want to work with so you at least have your 1031 lined up.  A good one can go over different senarios for you and help you brainstorm. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Glenn Clapp, You can owner finance and still complete a 1031 exchange.  It's a little more complicated and you have to have a cash source (of any kind) to replace the note that goes into  your exchange.  But it can be done for full tax deferral.

    To attempt to do an owner finance combined with a refi and a 1031 doesn't seem realistic. You cannot do a 1031 on a wraparound.  The 1031 will have to begin with the actual sale of the old property.  That means that a refi will have to be paid off.  So you'd be left in the same position.  Not to mention that red flags go up if a refinance occurs right before a sale when you are doing a 1031.

    A lease option would certainly work.  I would structure it carefully so it does not cross the bar to become an installment sale.  Otherwise your 1031 is triggered at the execution of that.  If you maintain it as an option to purchase in the future and a lease then yes, you could do a 1031 in the future when they execute their option and purchase the property.  In that event the option money will be taxable.

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  • Account Closed
    1031 Exchange Qualified Intermediary · Bend, OR · Member since 2015 · 44 posts · 10 votes
    9y

    Why do they need to move out before you list it?  You might find a buyer (investor) that wishes to have them stay - and they can perhaps sell the property to the tenants.  Or your tenants might decide to get their own financing and make you an offer.  More importantly, you can move on to the two properties that you have put in offers on and accomplish your goals with that equity you have tied up.   

    To do a 1031 exchange, the lining up of the timing can be tricky.  The more simplified it can be the better.  You might reach out to a couple of QIs and decide who you want to work with so you at least have your 1031 lined up.  A good one can go over different senarios for you and help you brainstorm. 

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  • Glenn Clapp
    OP
    Investor · Sandy, UT · Member since 2016 · 17 posts · 10 votes
    9y
    Originally posted by @Dave Foster:

    @Glenn Clapp, You can owner finance and still complete a 1031 exchange.  It's a little more complicated and you have to have a cash source (of any kind) to replace the note that goes into  your exchange.  But it can be done for full tax deferral.

    To attempt to do an owner finance combined with a refi and a 1031 doesn't seem realistic. You cannot do a 1031 on a wraparound.  The 1031 will have to begin with the actual sale of the old property.  That means that a refi will have to be paid off.  So you'd be left in the same position.  Not to mention that red flags go up if a refinance occurs right before a sale when you are doing a 1031.

    A lease option would certainly work.  I would structure it carefully so it does not cross the bar to become an installment sale.  Otherwise your 1031 is triggered at the execution of that.  If you maintain it as an option to purchase in the future and a lease then yes, you could do a 1031 in the future when they execute their option and purchase the property.  In that event the option money will be taxable.

     Thanks Dave, that is as I understand it from my reading this weekend. I appreciate the clarification and details. Great advice on the lease option. I read also that you must never ever mention a "credit" or other implication of any sort of equity position for any portion of the rent that could in the future be applied to reduce the final purchase price. "Consideration" was the suggested language. My preference is to sell, but I'm in no real rush as long as I can pull out sufficient equity and then sell later and maintain cash flow. 

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  • Glenn Clapp
    OP
    Investor · Sandy, UT · Member since 2016 · 17 posts · 10 votes
    9y
    Originally posted by @Account Closed:

    Why do they need to move out before you list it?  You might find a buyer (investor) that wishes to have them stay - and they can perhaps sell the property to the tenants.  Or your tenants might decide to get their own financing and make you an offer.  More importantly, you can move on to the two properties that you have put in offers on and accomplish your goals with that equity you have tied up.   

    To do a 1031 exchange, the lining up of the timing can be tricky.  The more simplified it can be the better.  You might reach out to a couple of QIs and decide who you want to work with so you at least have your 1031 lined up.  A good one can go over different senarios for you and help you brainstorm. 

    Hi Karen,

    Good point that an investor may be interested in the property with the tenants in residence. I'd been assuming it would not be of interest to an investor since My wife and I remodeled it and sort of over-remodeled it before we moved. We did things that are a bit over the top when it comes to a rental, but hey, the tenants like it enough that they'd rather buy it than move besides that few people enjoy moving. Still, I can let a new owner worry about that as long as the tenants maintain a showable condition and do not obstruct access for showings-- not that they would, but you never know. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Glenn Clapp, it's outside my wheel house but... I see a lot of folks using two documents to protect themselves in that way.  An option to purchase.  And a lease of the property.

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  • Jay Elggren
    Stansbury Park, UT · Member since 2017 · 13 posts · 10 votes
    9y

    Be careful of lease options and other types of seller financing. In most cases they are done wrong and be very costly mistake and leave you, as the seller exposed to several bad scenarios including those listed above by the experienced investors.

    I do a lot of seller finance and lease option deals on my properties. After learning the hard way I now put all my properties in a title holding land trust and I put my residents (tenants) on a triple net lease. This is the only way to protect yourself as the seller/owner of the property. 

    Now all my properties are protected from litigation. My equity is protected, and yes I can refinance at anytime to pull out my equity. I am fully protected by federal law (Garn–St Germain Depository Institutions Act of 1982) from the lender calling the note due, and there is no need for a 1031 exchange because the IRS can't classify it as a sale because I remain a beneficiary of the trust. There is no sale because the property is held by a trust that you control and it remains that way until the beneficiaries of the trust decide to sale it to the resident down the road (3-5 years)

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