1031 and lease option?

8 Replies

hi, 

If the seller doesn't want to wait unit the 1031 exchange (the selling of the 1st house before buying 2nd), can a buyer use the lease option to secure the deal before the 1031 take place? 

I know there's some strict restrictions on 1031,just dunno the lease option will violate them. 

Thanks,

Tommy  

I would say definitely.  An exclusive option to buy is a great strategy to secure a purchase for a future date.  That's what they do!

If I'm understanding correctly - you are wanting to buy the house, but need a little time for your 1031 sale of a different place of yours to close?  That's what my answer is based on @Tommy C. .  Investment property to investment property, correct?

@Tommy C. is right. The lease option can be a great way to lock up a property without taking title to it so it can still qualify as a replacement property in a 1031 exchange. All of our reverse exchanges include those exact elements - an option to purchase and NNN lease.

The thing you want to watch out for is a concept the service calls "risk of loss passing".  This is the point where the bundle of rights you have as the lessor/optioner of the property are so comprehensive and strong that in essence the ownership/control of the property has already transferred to you.

The application of risk of loss passing is seen more in land contracts and lease to deed situations but given that option contracts can look very differently you'll want to pass it by your QI first.

Thanks guys! 

It's interesting that a closing date in the far future can work as lease option as well, I have never thought of that. But can you operate an investment property during that period you are waiting to close before title transfer? I assume a lease option allows ones to operate and collect income from the property during the leasing period?

@Steve Vaughan

@Dave Foster

@Brian Gibbons

@Tommy C. - without your answering any questions posed above, I am out of this.  We can't possibly take you through every scenario without knowing what you're trying to do.  Maybe you're selling your primary house and the premise of the 1031  is all wrong? 

For the benefit of others...

How far into the future are you talking about?  10 years? 10 months?  

yea, I am trying to do a 1031 for my rental and roll into another rental.

Probably in the next 2-3 years

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