L/O and the 1031 - Posted by David Harris

Posted by JPiper on May 22, 1999 at 01:15:04:

I hear exactly the opposite. A lease/option is not a sale, and an option premium is not earned until exercise.


L/O and the 1031 - Posted by David Harris

Posted by David Harris on May 21, 1999 at 08:29:35:

I don’t recall anyone talking about if it is possible to L/O a property and when it is sold doing a 1031 exchange.

The property in question has been a rental for nine years.
Please any help will be appreciated.


Instead of breaking the tie, I have a third possibility. - Posted by John Katitus

Posted by John Katitus on May 22, 1999 at 02:25:56:

I asked this question a while back, and got a seemingly reliable answer that made sense.

The poster said the option money, since it is already received, is not eligible, but the balance of the sale (exercise of the option) could be 1031’d.

Re: L/O and the 1031 - Posted by Bill Gatten

Posted by Bill Gatten on May 21, 1999 at 20:43:11:

My understanding is that the IRS will consider the option a contract for sale at the date of the contract (when the agreement was structured) and once the 180 day window period is by-passed, the 1031 Eschange will not be accepted. Be very careful.

Suggest you call 1 800 767 1031 for a legimate answer. Speak there with a Mr. Tulley.

Bill J.

Re: Instead of breaking the tie - Posted by JPiper

Posted by JPiper on May 22, 1999 at 10:44:18:

The problem with Mr. Tulley’s statement cited by Mr. Gatten is that in order for it to be correct, one must assume that ALL lease/options are the same, and that they are ALL viewed as installment sales by the IRS. Neither of these assumptions are correct.

The IRS rules state that a new upleg property must be identified 45 days from the date of closing of the relinquished property, and that you must close on the upleg 180 days from that date. These time periods are not measured from the date of the initial contract. So unless Mr. Tulley’s claim is that a lease/option is a closed sale (installment sale) from the date it is executed, the statement is totally off base.

The other possibility is that Mr. Tulley believes that receipt of option consideration totally renders an exchange impossible. However, IF the lease/option is NOT characterized as an installment sale by the IRS, receipt of option consideration is not even a reportable item to the IRS UNTIL the option is exercised (or expired except that if it expired there would presumably not be an exchange). Further, participants in a 1031 exchange CAN receive “cash boot” without rendering the exchange ineffective.

So we’re left with the question “Are ALL lease/options installment sales?” in the eyes of the IRS. The answer of course is no?.in their own rules they have criteria, the application of which determines whether or not the lease/option is an installment sale. So even the IRS recognizes that a lease/option can be either?.an installment sale or a lease/option?.just depends. If the transaction is NOT an installment sale, then the identification period and the closing period are NOT running until the option is actually exercised AND closed, just as it would in ANY OTHER transaction.

I would check with William Exeter with Security Trust. He’ll be able to further enlighten you regarding 1031 exchanges.