Seller financing, 1031 Exchange, Lease Option

[Aleta Coleman]

Hi all,

I'm considering selling my SFH rental property in Parker, CO via owner financing and 1031 exchange. As some of you may know, CO is currently in a HOT market and Parker continues to grow steadily as a suburb in the southern Denver metro area. My current tenants have been in the property since 2013 and their lease is up end of June, 2017. Current rent is $2100/mos., about $200 less than current market rents. However, my tenants rent is locked in until the end of their above stated lease.

I want to leverage some of the equity (approximately $130K-$150K) I have built up in that property in order to purchase and grow my RE biz and portfolio. I'm planning on meeting with an RE tax attorney about this when I go to CO next month, as I currently live in IL. Cash out refi and heloc are not seeming options at this juncture since I just officially started my RE investing business, am self employed (debt/income ratio) and I'm working on improving my FICO scores. 

Thought some of you more seasoned investors / experts could give me more insight on how to structure this and/or other possible exit strategies in this situation in order to reduce my capital gains tax?

Thanks in advance!!

 Aleta

[Bill S.]

@Aleta Coleman 1031 and seller financing don't typically go together. Seller financing and having a loan on the property can also be problematic. You can't convey clear title to the buyer and there is the due on sale clause that may be called by the current lender.

Getting at the $130-150K of equity will be challenging without selling the property outright. Getting at the $130-150K and doing a 1031 exchange is also not likely as it has to be rolled into the new property. The best you can do is, if you have an real estate license, take out your commission (typically 5-7%) when you sell. 

Other than riding it out until the tenant's lease is done I don't really have any good advise.

If you absolutely need the money then, the best bet is to negotiate a buyout for the current tenants, sell and pay the taxes.