L/O, auction sales, and the 1031 tax exchange - Posted by DJR

Posted by DJR on January 15, 2001 at 11:58:54:

Mr. Branstetter,

I will definitely look into the reverse exchange idea. Anything that has the potential of saving thousands of dollars in taxes is certainly worth a little time and trouble on my part.

Thanks for your input,


L/O, auction sales, and the 1031 tax exchange - Posted by DJR

Posted by DJR on January 14, 2001 at 13:59:31:


Is it possible to roll a house that sold via a lease option into a 1031 exchange, or does the option somehow negate that as a legal avenue. Also, does anyone know of a reason why I couldn’t roll my gains over into a house bought at a trustee’s sale?

Here’s my idea:

  1. Buy a house at a trustee’s or sherriff’s sale.

  2. Pull my money out by establishing a line of credit on the property which if bought at enough of a discount I should be able to do (I have done the above twice already in the last 6 months)

  3. (Now what I’ve never tried) L/O the house.

  4. When the T/B’s exercise their option, exchange the gains into another house bought at a trustee’s or sherriff’s sale and repeat the process. Of course this assumes that another house can be identified and bought at the auction. (most houses seem never to make it to sale and those that do usually have healthy competition for them.

Is such a scenerio feasable/legal? I’m aware of the many pitfalls especially with regard to the caprecious nature of the auction sales, but I was just sitting around this Sunday morning thinking. Am I way out in left field?

Thanks and a great year to all investors; veterans and newcomers!!


Re: 1031 tax exchange - Posted by JPiper

Posted by JPiper on January 14, 2001 at 20:36:40:

Personally I don?t see this as a practical strategy, but here are some of the rules?.you decide:

To comply with exchange rules you?re going to have to identify properties in one of the following ways: 1) You can identify up to 3 properties with no regard to value 2) You can identify 4 or more properties whose total value cannot exceed 200% of the sold property or 3) You can identify 4 or more properties whose value is greater than 200% of the sold property, but then you must close on 95% of them.

You have 45 days from your close to identify. In the case of a trustee sale you probably will have to put up cash the day of sale. The problem here is that you don?t have the cash?.the intermediary has your cash as required by the rules of an exchange. Whether you can get the intermediary to wire cash in a manner to satisfy the trustee AND not violate exchange rules, and do all this upon completion of the trustee sale?well good luck on that one.

And I think you point out a real problem?.being able to successfully identify a few properties that actually go to sale. Again, if the value of the property EXCEEDS 200% of the value of your property sold then you must close on 95%?.a tall order indeed.


Re: 1031 tax exchange - Posted by DJR

Posted by DJR on January 14, 2001 at 22:39:55:

Mr. Piper,

Thanks for the information. Originally, in the relm of my naivete, I was thinking about using a cashier’s check from my line of credit to initially buy the property. Then afterword, having the exchange trustee sweep the funds from the L/O sale into my line of credit, but the more I think about this, the more complicated it seems to grow. I have only been learning about creative REI for about a year, and configuring this type of transaction may be, for now, a bit beyond my knowledge base.

I figure though that with the bite that Uncle Sam takes in capital gains, it’s worth spending a few minutes thinking about.

If anyone has an answer to my first question about exchanging out of a L/O I’d appeciate hearing your thoughts as well. Maybe I’ll skip over the idea of exchanging into auction properties and stick with the more traditional fare.

Thanks again,


Re: 1031 tax exchange - Posted by Bud Branstetter

Posted by Bud Branstetter on January 15, 2001 at 09:25:17:

If you have an income property that was for investment purposes you can exchange it via the 1031 route. There are a number of paperwork things to be sure it was not just a disguised sale. Of course if it is several years it helps out.

There are things call reverse 1031’s. You acquire the exchange property first(at the auction) then you sell the old investment property. If you contact some of the intermediaries they can give you the specific’s on what is needed. While this approach is not common they have been doing it.