1031 and an option to purchase in future

1 Reply

Have done multiple 1031s over the years but the question came up on a seller that is agreeable to terms of a future for sale while the buyer is looking to sell another property and porting the funds at a future date within the next 18 months after a sale is completed.  

variables would be 10 percent down for the option and 2500 a month rent/paydown towards the purchase amount.

can not find a reason why it could not be ported exempt funds except maybe not for the total amount (settled price minus down minus paydown)

thanks

@David Billitto , I'm not sure what you mean by "ported exempt".  Unless you're asking if the buyer can use the 1031 exchange to purchase a property that they are currently renting and have an option to purchase.  The answer to that is absolutely.  As long as the terms of the lease and option are not so strong that they actually create "risk of loss passing" from the seller to them.  This concept is used to differentiated between a simple lease with an option (which doesn't shift any of the burdens and benefits of ownership) and an land contract sale (where the determination is that the sale has occurred even though the deed does not transfer until the last payment is made.

You'll want to avoid that "risk of loss passing" threshold.  A simple lease with an option to purchase (as long as the option isn't priced too high) would be fine.  

One more thing to consider along this line would be any principle reduction during the term of the lease could very easily push you into "risk of loss passing".  And at the very least that reduction of principle gives the buyer an equitable interest in the property so if they are not able to complete the transaction you could very easily be looking at a foreclosure proceeding rather than a simple eviction or termination of lease.