Owmer financing structure

[Scott Royer]

My tenant of 3 years is interested in converting his next lease renewal to an owner finance purchase and I was hoping someone might have some examples of what they've done in the past. They don't have the cash to do a normal down payment. Some relevant financials are below...any help from the crowd would be appreciated as if like to explore this and do a 1031 in two years. Current rent - $850 Current property value - $75kish No current mortgage Located outside Houston and appreciating at around 4% a year If tenant moves I'd do maybe $20k in renovations to update kitchen, floorplan and exterior siding but house is functional

[Dave Foster]

@Scott Royer, If you want to do a 1031 then you have to initiate it at the time of sale.  And you only have 180 days to complete that purchase.  When the buyer purchases the property  the 1031 must start and the proceeds must go into your 1031 account.  These proceeds would be the down payment and the note.  Both must be used in your replacement property purchase if you want to avoid taxes.  So what 1031 clients will do is to replace the note in their exchange account with cash from anywhere else.  Now they have the note outside the exchange account so it is no  longer taxable or part of the 1031.  They also now have enough cash in their exchange account so they can complete their exchange.  

I get what @Skylar Simpson is getting at but it won't work.  Either the deed passes and your 1031 has to start at that moment, or a contract for deed is signed as he suggests and that too triggers the start of the 1031.  The reason is a concept called either "risk of loss passing" or "receipt of benefits and burdens of ownership".  Whether or not a deed actually passes is irrelevant if the IRS determines that risk of loss has passed to another individual or if your buyer has received the benefits and burdens of ownership.  Either way the IRS perceives that the sale has occurred at that moment and so your 1031 window is 180 days from there.

You already have a lease with them.  You could add a lease option as a separate document that gives them the right to purchase the property at a mutually agreed upon price in exchange for a sum of cash given.  You keep ownership and the lease intact.  They get the right to purchase when their financing cleans up.   When done the right way a lease/option does not trigger your 1031 start.

But honestly somethings' wonkey here and others are feeling it too from the comments. a home purchase of $75K would command a down payment of $2625 in an FHA guaranteed loan. I'm having a tough time seeing how you can structure anything to your benefit with a tenant that can't come up with that for a down payment. You can build all the upside you want into the owner carry loan but at the end of the day it all depends on them being able to perform in the future. How probable is that?