Posted by SteveC_GA on January 23, 2003 at 13:12:53:
Brian,
You bring up a point about the 1031 that many people aren’t aware of, the fact that you can exchange into a long-term lease (30 years or more).
"Can I buy this MHP on a lease with an option as long as the lease is for 30 years or longer as part of my 1031 exchange? "
Yes, but you technically wouldn’t be buying the property, you would just have a leasehold interest with an option to purchase. You must record this option in order to protect your interest.
"What if the seller is older and not expected to live more then 30 years? "
That’s OK, you probably won’t hold the property that long anyway. If the guy passes away, you still have interest in the property no matter who he lives it to. It might even create a better situation for you after his death because most heirs want the cash as soon as possible. They may be willing to take a much lower option price if you pay them off early.
“Can I use my option any time within those 30 years and “buy” the MHP without penalty or would I always just be leasing the park?”
You can exercise the option at any time, however unless you 1031 again, the capital gains from the first property will eventually catch up with you.
“What are the advantages for the seller (and me for that matter) in doing this type of deal?”
One advantage to the seller is that if his tax basis is low in the property, he doesn’t have to worry about capital gains tax from a sale since he still owns the property and is only leasing it to you.
Another advantage would be a steady passive income from your lease payments for a long time.
Typically, we use a long term lease/option to solve a seller’s tax problem. For instance, we are working on a deal right now in NC where a seller has a tax basis of 250K in a property that is worth about 3 mill. He has a mortgage of 2.9 mill on the property. As you can see, he has pulled out much of the profit via a mortgage. Unfortunately, he lost all of this money in another deal. The only way he is going to get out of this tax problem is to lease the property and give us an option to buy. If we don’t exercise the option while he is still alive, he doesn’t have to worry about the capital gains.
If your case Brian, I would just go ahead and see if the seller will sell with owner financing. Convince him of the benefits of the monthly income from the financing and the fact that he should be able to report the profit under the installment sales method which will ease the tax implications.
I hope this helps.
Good Luck
Steve Case