What is the name of your state? Arizona

Hello, Thanks in advance for any help. We are trying to purchase our house from our landlord, he is willing to work a deal, but there is one small problem.

He purchased the home one year ago in a 1031 exchange, and if he were to sell now he would have to pay the taxes. We are renting the home now and he only wants retirement income, not a cash windfall. This is an investment property not his personal residence. We are both ok working something out as long as there are no tax ramifications for him.

I am not sure of the time lines involved with a 1031, he thinks he needs to hold the house for 5 years but I am thinking it is only 2 years... If there is a transfer of deed, can he roll the whole thing into another 1031? I was under the impression that if you continue to roll into another property, there would be no taxes.

If it is 2 years we thought we could do a lease w/option for two years, and then transfer the deed. That would be 3 years from his original purchase date, and he would buy something else on another 1031.

If it is 5 years I am at a loss of ideas, as I do not want to wait that long on a lease.

I am wondering if he does owner financing, with nothing down, and there is no real cash gain except a paper gain over time as a mortgage holder????

We are willing to be creative as long as it is safe for both of us. I am hoping to do the lease for 2 years or owner financing.

Thanks for the help,

A 1031 is short for Section 1031 of the Internal Revenue Service code dealing with real estate exchanges.

1031 exchanges deal with the exchange of what the IRS calls "like kind" real estate, i.e. exchange a house for another house, land for land, etc., as a general rule.

Depending on his tax situation he will probably have to pay capital gains whenever he sells; the IRS exclusion on capital gains only applies to one's principal residence they have lived in any 2 of the past 5 years.

If he were to do simple owner financing for you on the house that would let him spread out his tax consequences over a period of years and give him an income as well from your payments; have you suggested that with him???

Generally the IRS doesn't count income as income until you actually receive it so he could do "nothing down" owner financing with you and just pay his taxes annually on the income from your mortgage payments to him.

I don't know if there is a time period that must pass in order to escape tax penalites on property received from a 1031 exchange. You need to talk with a tax professional about that or have your landlord talk to his tax guy to see what his options are.

Your landlord needs to be careful. I remember something about cases like this where, even if he sells and carrys 100%, he's taxes on the sale amount at the time of sale (now). You can discount that note at some cost of capital, and just pay taxes on that amount, though.

I believe you are only taxed on the annual payments in an installment sale.

According to IRS guidelines I've read and my CPA has advised me; income is not income until you actually receive it.

I very strongly advise anyone to verify this information with a competent tax professional or the IRS.