Help In Structuring A Deal
What is the name of your state? Arizona
Hello, Thanks in advance for any help. We are trying to purchase our house from our landlord, he is willing to work a deal, but there is one small problem.
He purchased the home one year ago in a 1031 exchange, and if he were to sell now he would have to pay the taxes. We are renting the home now and he only wants retirement income, not a cash windfall. This is an investment property not his personal residence. We are both ok working something out as long as there are no tax ramifications for him.
I am not sure of the time lines involved with a 1031, he thinks he needs to hold the house for 5 years but I am thinking it is only 2 years... If there is a transfer of deed, can he roll the whole thing into another 1031? I was under the impression that if you continue to roll into another property, there would be no taxes.
If it is 2 years we thought we could do a lease w/option for two years, and then transfer the deed. That would be 3 years from his original purchase date, and he would buy something else on another 1031.
If it is 5 years I am at a loss of ideas, as I do not want to wait that long on a lease.
I am wondering if he does owner financing, with nothing down, and there is no real cash gain except a paper gain over time as a mortgage holder????
We are willing to be creative as long as it is safe for both of us. I am hoping to do the lease for 2 years or owner financing.
Thanks for the help,
This is a little complicated so hopefully someone with more expertise in this area can chime in.
As far as a 1031 there is no holding requirement set in stone except that the burdon of proof is on the taxpayer for proving intent of a long term hold. Most accountants and 1031 experts recommend 1-2 years or longer.
The only time a 2 or 5 year holding time comes into play is a section 121 exclusion which allows a taxpayer to take $250,000 ($500,000 if married) tax free without paying capital gains tax. To qualify for this you must live in and own the home for 2 out of the past 5 years. IF someone is going from a 1031 exchange to a 121 exclusion there then the same 2 out of the past 5 years rule still applies but there is an additional requirement that you must own the property for 5 years.
So my question to you is--did your landlord live in this property? If not he can sell at any time...3 years is certainly long enough to sell. Of course he will be paying tax on that unless he does another 1031 exchange and buys another property.
As far as the tax consequence if he sells to you on contract--that is a complicated matter but it is likely only have to pay taxes on the gain he receives in each year. This is something he should seek competent professional advise but if it were me, I would not want to be in this situation.
GOOD LUCK
Quote:
On 2005-01-12 17:47, myfrogger wrote:
This is a little complicated so hopefully someone with more expertise in this area can chime in.
As far as a 1031 there is no holding requirement set in stone except that the burdon of proof is on the taxpayer for proving intent of a long term hold. Most accountants and 1031 experts recommend 1-2 years or longer.
The only time a 2 or 5 year holding time comes into play is a section 121 exclusion which allows a taxpayer to take $250,000 ($500,000 if married) tax free without paying capital gains tax. To qualify for this you must live in and own the home for 2 out of the past 5 years. IF someone is going from a 1031 exchange to a 121 exclusion there then the same 2 out of the past 5 years rule still applies but there is an additional requirement that you must own the property for 5 years.
So my question to you is--did your landlord live in this property? If not he can sell at any time...3 years is certainly long enough to sell. Of course he will be paying tax on that unless he does another 1031 exchange and buys another property.
As far as the tax consequence if he sells to you on contract--that is a complicated matter but it is likely only have to pay taxes on the gain he receives in each year. This is something he should seek competent professional advise but if it were me, I would not want to be in this situation.
GOOD LUCK
Thanks for your help; I was thinking the same way you are. As long as he does another 1031 at the end of our 2-year lease he should be able to divert the tax burden on the new gain as well as the existing gain to a new property using a 1031 exchange, correct?
I do not think 121 applies since this is not a personal residence, he has never lived in the house, and he is not taking a personal capital gains exemption on the taxes.
He will do a new 1031 exchange with the proceeds of our sale. This will take place after our 2-year lease period, and will be a total of 3 years and one day from the day of his original purchase of the house.
This is complicated and I really appreciate your thinking on this. We will both have counsel in this deal, I just like going in with some basic game plan instead of going in blind!
Thanks
Cliff