Can an owner 1031 exchange a contract for deed?

[Justin Hennig]

Probably an ignorant sounding question: Can a property owner 1031 exchange out of a contract for deed once the contract is fulfilled? I'm talking about buying to The Owner of an apartment building who owns it free and clear and is afraid to sell outright without doing a 1031 into something else. The real fear is paying taxes...I'm trying to work out a contract for deed with them, which would somewhat lower my need for a large down payment. Could they 1031 out of the CD when I refinance and buy them out of the CD? Thank you!

[Dave Foster]

@Justin Hennig,  In what you're describing there is another element that weighs in rather than the actual deed transfer.  the legal concept is "risk of loss".  Once the risk of loss has passed substantially the seller has in essence completed their sale and is no longer eligible for a 1031 exchange whether or not deed has actually passed.  A simple option to purchase a piece of property is usually not deemed to pass the risk of loss thresh hold.  A land contract is usually seen as crossing over.  I can see at least 3 options that are worth exploring for you in this instance.

1. You may want to think about an option and master lease concept with them.  Then when you exercise the option and purchase they could 1031.

2. The other thing that might be helpful is to have them explore the tax ramifications of a note sale.  Although they will pay tax on all gain it will be spread out, thus lessening the blow to them.

3. If they are in a strong cash position they could simply sell outright to you now and carry a note back that they put into their exchange and then replace with cash.  There are ways we can accomplish this so you get the advantages of a significant owner-carry. And they get to sell their property now, enjoy note income with tax only on the interest, and complete a 1031 exchange deferring all tax on their sale.

That should get you started. Happy Tuesday.