L/O tax requirement for sellers? - Posted by R.Bruce(MD)

Posted by JHyre in Ohio on April 18, 1999 at 08:33:05:

Jim is correct. 1031 is not fouled by L/O given that the exchange was correctly done to begin with. Sounds like owners held for 2+ years, so 1031 should not be retroactively fouled. Property is considered sold when option is exercised, not when L/O is entered into.

Article by Bronchick (www.legalwiz.com) gives some good pointers on structuring L/O’s to avoid being treated as financing by IRS.
John Hyre

L/O tax requirement for sellers? - Posted by R.Bruce(MD)

Posted by R.Bruce(MD) on April 16, 1999 at 15:20:07:

I am trying to get a seller to agree on a l/o for a townhouse they purchased through a 1031 exchange. They are unsure (as am I) of the tax implications on doing this. Is anyone familar with the tax regs for selling a 1031 acquired property by l/o?

These folks have never lived in the property. They have owned it as a rental for just over two years. Currently the property is offered for rent, and the owners wish to buy a house in about a year, which would mean the sale of the townhouse. They do not want to seller finance, but my offer has intrigued them because they don’t need cash for a year, and when the option is exercised, they won’t have the hassle of trying to sell next year to buy a house. So this solves two of their problems (finding a renter & then a buyer) and fits their timeline, with the exceptions of 1. Possible tax implications (cap gains, is it considered sold now, etc.) and 2. Rental is listed with a realtor (paying commission on rental or sale?).

I am pretty sure I can work something out with the realtor (rental comm. now, sale comm. at option exercise), but I need to strengthen my presentation of how they will benefit by doing this. Thanks for any ideas or input!

Re: L/O tax requirement for sellers? - Posted by SCook85

Posted by SCook85 on April 17, 1999 at 09:03:38:

My answer as far as the realtor goes is this. I don’t ever cut a realtor out of a deal, that is provided that I ever talked to them. This is more of an issue from your sellers end. If you and the seller started talking through means that did not include the realtor and you have not brought the realtor into the picture I would have the seller contact the realtor and let them know that they want to cancel there listing. I am here in MD and have outsold my realtors all 3 times they have listed one of my properties. You can cancel any listing contract in MD with a notice which I believe to be 24 hours.
Not one of the realtors that I have cancelled with to date has balked about it. I know that there are some who will threaten to pursue damages and they can pursue it, but it is unlikely that they will win. It’s really up to the seller. It’s not your problem. If the seller had the property listed as a rental they were prepared to pay anyway. They shouldn’t put the burden on your shoulders.


Realtor Commission - Posted by Sean

Posted by Sean on April 16, 1999 at 16:33:40:

The answer to your Realtor commission is the Realtor would expect both a commission on the rental and a commission on the sale when(if) it occurs.

Re: L/O tax requirement for sellers? - Posted by JPiper

Posted by JPiper on April 16, 1999 at 15:57:00:

The easy answer here is that a lease/option is not a sale, and therefore does not trigger tax consequences.

Having said this however, your lease/option DOES need to be structured correctly with the IRS in mind. Criteria like length of lease, size of rent credit, whether the rent is fair market rent, etc. are factors that would be looked at by the IRS.

A good CPA should be able to inform you of these criteria. But providing you have structured correctly a lease/option is not a sale, and upon exercise the seller may 1031 into another like-kind property.