Help!! Land Contract w/ building owned less than 1 year

2 Replies

Hi guys, hoping some experienced people out there can assist.... I purchased two commercial condos late last year. I put my business in 1 of them and the other space I was going to rent out. I found a great tenant. However, they REALLY want to own and made me an offer to sell that I can't refuse. We got to talking and I think seller financing would work really great in this situation. We have come to a rough agreement on terms.

The problem is this property was part of a 1031 exchange. It also was purchased in August 2017, so if I sell it now I would have to pay short term capital gains. I obviously do not want to do that so I want to wait until at least August (if not much later) to "record" the gain.

My question is.... even if it is several years before the financing is paid off and the deed is transferred to the buyer, for accounting purposes --- when is the "gain on sale" actually recorded?

I have a hunch it is recorded immediately..... basically the asset is covered into a receivable and the gain is recorded. However, that is just in my accounting software. I assume the actual sale with the county would not be recorded until the deed is transferred, correct?

So for tax purposes, when and how much gain would I report during this process?

Ugh! Help!

@James Lantis , The term is "risk of loss".  When risk of loss passes the property is deemed transferred to the next owner.  So a land contract just about always triggers the recognition of gain immediately.  So that won't help your 1031.

You could use a lease option with that tenant to get you past August.  

And you could also explore with your team how strong your case for a hold intent is.  There is no statutory holding period and an unsolicited offer to purchase can be a very strong mitigating factor to a short hold in a 1031.

Thanks for the reply. I guess my confusion is I don't understand what "event" or what "document" determines the sale date....

Could I sign a land contract now that doesn't start payments until August? Or does merely signing the document force the sale date now?

Could I have a standard lease for 6 months, and then start the land contract immediately after?

The only issue with that is I would want to collect a downpayment/deposit now. Could I account for the large down payment as a "security deposit" and then conver that into the down payment once the land contract starts?

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