1031 - If you sell a house on contract how does a 1031 work

Nashua, IA · Member since 2016 · 6 posts · 4 votes

Curious as to how a 1031 exchange works when selling a house on contract. If I sell a house on contract when does the 1031 exchange actually take place?

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Rylan Zwanziger, selling a house under a land contract where you collect payments but title doesn't transfer until all the payments have been made is a tricky situation for a 1031 exchange.
By statute the 1031 starts with the sale of your old property and you use the proceeds without having constructive or actual receipt of them to purchase your new property. In a land contract you might think that means that you can wait until the title transfers and that is when the sale occurs.
Unfortunately a couple of things come into play.
1. There is a legal concept called "risk of loss passing" which describes the actual transfer of property happening when the risk of loss has substantially passed to the buyer or when the buy has received the benefits and burdens of ownership. In a land contract that usually happens that the signing of the contract even though payment is not rendered.
2. Receipt of funds - Along with that you are receiving monthly proceeds in payment for the property which would normally be separate from you in an exchange account. In a land contract you touch the money so it would become taxable as boot to you immediately anyway.
3. Time frames - The entire period of a 1031 can be no more than 180 days. Most land contracts are set up for years.
Depending on your individual situation there might still be a way to structure the land contract to work with a 1031 but it's difficult.
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Rylan Zwanziger
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Nashua, IA · Member since 2016 · 6 posts · 4 votes
8y
@Dave Foster Thanks for the reply! I currently have one home that was sold on contract this past summer, I'm figuring if anything can be done it will be difficult with that one.
I currently have another deal in which we have a buyer wanting to buy on contract from us and it got me thinking as to how or if a 1031 exchange could work in this situation and what type of capital gains I would be looking at.
Current deal is pretty similar to our one this summer. As of right now would be looking at selling a duplex for 55k that we bought for 40k this past year. Buyer does have 10k to put down and we would be looking to take that down payment to immediately put into another property.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Rylan Zwanziger, Yes the first one is definitely out. I'd have to learn more about the specifics of the contract to see what's possible for the second. But it looks like your gain is only going to result in a 3-4K tax. a regular 1031 exchange on a sale would still result in some savings but not too much. You might be better off just redeploying the capital as it comes in on this one.
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