1031 and lease option?

Question

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

Dave Foster · Answer

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.

Cody Farmer · Answer

RE: IRA secures lease & 1031 exchange comes in later refunds deposit?

Can I use my self directed 401k to place a deposit on a condo lease  option I'll either sell or have to buy with my 1031 exchange?

Example  secure condo for owners equity of $28k. Fill it with tenant and sell it  for profit (double close) IF NOT Attractive, buy useing 1031 exchange money of  $65k and get the $28k IRA deposit back at closing?

Steve Vaughan · Answer

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?

Brian Gibbons · Answer

Tommy C.

Steve Vaughan · Answer

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. · Answer

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

Probably in the next 2-3 years

Dave Foster · Answer

The right to sublease and a management agreement would need to be inherently negotiated as would terms of lease and owners responsibilities vs tenant responsibilities.

Brian Gibbons · Answer

You can have a Lease  + a Delayed Sale & Purchase.

Tommy C. · Answer

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

1031 and lease option?

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