1031 Exchange
Could someone explain a little better a 1031 a-b-c delayed exchange. If I lease option the property I own does my non-refundible option go into the same escrow with sale proceeds? Will the 1031 shelter my cap gain and free me from depreciation recapture? Can I even set this up using a L/O to my tenant buyer and then find another available property that I can close soon after my tenant exercises their option? I know thats alot of questions but I don't very well understand this 1031 stuff yet..=O)
Bri[ Edited by Brill on Date 10/21/2003 ]
Quote:Could someone explain a little better a 1031 a-b-c delayed exchange. Let's call you B (for Brill). Charles has a property for sale that you want. It would be easy to do a simultaneous exchange of your property for Charles' property, but Charles does not want your property. Instead, you put your property up for sale, and accept Adam's offer to buy your property.
Now to structure the transaction as a tax deferred exchange, you engage the services of a qualified intermediary to escrow all of the proceeds of the sale of your property to Adam, and to apply those proceeds to the purchase of your "replacement" property from Charles -- all in accordance with your written exchange agreement. At settlement, you direct deed your property to Adam and the proceeds of the sale go to your intermediary. Within the next 180 days, Charles direct deeds his property to you, while your exchange escrow agent (the intermediary) disburses all of the funds from the sale of your relinquished property. There are strict timelines to be followed, and restrictions on the property you can acquire in an exchange, but this is an a-b-c exchange in a nutshell. At no time during the exchange, are you allowed to touch any of the money received from the sale of your relinquished property. You are allowed to add your personal funds to the purchase of the replacement property.
Quote:If I lease option the property I own does my non-refundible option go into the same escrow with sale proceeds? This is a good question for your tax attorney. I would say that you already have constructive receipt of the option consideration and this then becomes taxable boot because the money passed through your hands. Just my opinion, though.
Quote:Will the 1031 shelter my cap gain and free me from depreciation recapture? Yes, a qualified 1031 exchange defers your capital gains as well as your depreciation recapture.
Quote:Can I even set this up using a L/O to my seller and then find another available property that I can close soon after my tenant exercises their option? Now you are putting yourself in a sandwich lease option situation. You do not actually own the property until you exercise your option -- until then you are a master tenant. Your tenant-buyer is a sub-tenant. You would report your income and expenses in this situation on Schedule C and Schedule SE. Any net income is active income. The property underlying the deal is not eligible to participate in a 1031 exchange for you in the master tenant position, BUT it is eligible to participate in a 1031 exchange for the original seller (assuming it was a qualified investment property to begin with).[ Edited by DaveT on Date 10/21/2003 ]
As always, many thanks Dave. You are always clear and concise..
but let me clarify on the last part a bit more. I own the house and I only want to sell on a L/O ,not sandwich lease I am concerned that my Option money may throw a wrench into the exchange process
Thanks again
Brian[ Edited by Brill on Date 10/21/2003 ]
This was my understanding when I answered your second question. In my opinion, the option consideration received is taxable boot but the bulk of your profit should be covered by the exchange umbrella. Let's say your option consideration is $2K, and your ordinary income tax rate is only 25%, then your tax bite is only $500.
If you never meant to ask about a sandwich lease, then you need to restate your fourth question. You L/O from your seller then put a tenant-buyer in place without exercising your option, sounds exactly like a sandwich lease situation.
Sorry Dave you are right I reread my question and I miswrote the last question..I meant set up a L/O on prop I own and have it be sub to a 1031 exchange..
Again thanks for taking the time
Bri
OK. Now that you have restated your last question, the answer is YES.
As long as the property would otherwise qualify to participate in a 1031 like-kind exchange, you are free to sell your relinquished property via a lease option.
If there is a monkeywrench in this deal, it is the lease option itself. What if the tenant-buyer never exercises their option? If there is never a sale, then you can never start the countdown clock on a 1031 exchange.
I am sure that when it gets close I can get a feel for whether or not they will exercise and if I need to find alternate funding if I am still interested in the property that would have been involved inmy exchange..
Thanks
Bri