Lease Optioning Raw Land, Then 1031 Exchange?
I want to sell some hunting land I got cheaply for a profit, but want to reduce or defer the capital gains. Ideally, I'd like to arrange an Option to Buy (with the highest option payment I can get), then, using a separate lease agreement, lease the property fo the same person allowing him/her to buy it after 1-2 years.
This way I hope to either 1) reduce the capital gains to long term by holding for over a year, or 2) allow me to arrange a 1031 exchange before the option is exercised to buy the land. I haven't been at this business long enough to appear on the IRS's radar screen as anything yet--this is my first year in Real Estate--and I don't want to get labelled with "dealer" status by flipping property too quickly. Does this plan make sense, or am I asking for trouble?
Would this question be more appropriately posted in the Tax Strategies Forum? Any Lease Option folks have any insights pertaining to tax planning? How is an option payment countted for tax reasons, is it just ordinary income? Thanks.[ Edited by loon on Date 09/20/2004 ]
Option Consideration is tax-deferred until either the Option is exercised or defaulted. A L/O for 60 months or longer is considered an installment sale for tax purposes.