1031 exchange:
Your Real Estate Contract Options Exchange
Options / Purchase Contract Exchange
1031x of OPTIONS/CONTRACTS TO BUY
Smart real estate investors sometime contract to buy real estate well in advance of closing. In an appreciating market, this allows the contract buyer to achieve a gain in the transaction prior to purchase. Sometimes this occurs on new construction where the developer needs pre-sales to satisfy their construction lender. As construction progresses, prices rise, and the contract buyer achieves a gain as the sales price of the property increases.
The question arises: Can the contract buyer 1031x the CONTRACT to purchase rather than actually closing and owning fee title? If the contract buyer can assign their interest in the purchase contract to a third party buyer for a gain, and 1031x into a new contract to purchase—the contract buyer can defer taxes on the gain while keeping the transaction in small dollar limits. Remember the general rule that you must trade equal or up in value to defer taxes in a 1031x. The contract to purchase would be assigned for a relatively small dollar amount. Therefore, the replacement contract could also be of small dollar amount.
Little tax authority exists in this area. However, the Federal ninth circuit in a 1031x case stated: “… a contractual right to assume the rights of ownership should not, we believe, be treated as any different than the ownership rights themselves.”
CONCLUSION: Contract rights to purchase real estate CAN be 1031 exchanged for other contract rights to purchase. Click on the following link to contact us for more information or call us at 888-899-1031.
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