The tax code is replete with timing deadlines that can be used to negotiate better terms. Section 1031 requires a seller to have identified qualified replacement properties within 45 days, and to have completed the purchase transaction within the earlier of 180 days or by the date the next tax return is due, including extensions. Many a seller who uses up all this interval shopping for bargains is eventually confronted with the prospect of either buying something, or paying taxes.
When you consider that capital gains taxes are only 20%, it would seem that someone in the midst of a tax-free exchange would still be pretty discriminating, but that's not always true. I've seen a lot of over-priced property snapped up by panic-stricken exchangers in order to avoid paying taxes.
Time plays a big part when it comes to being able to sell his or her principal personal residence tax free. To do this, a seller must occupy and own it any 2 out of the immediately prior 5 years. Sometimes a seller needs to raise money, but although he might have owned a rental he's converted to a home for two years, might not have lived in it the requisite 2 years. He could sell an Option on the property at a bargain price in order to get his hands on needed cash.
The Option would permit him to complete his residency requirement prior to sale. He could buy the Option back at a negotiated price from its purchaser, which if held 18 months, would enable the purchaser to pay taxes on his profit at capital gains rates. Or the purchaser could complete the purchase, move in, and re-sell the property to realize tax-free gains of his own after two more years.
Sellers can also use timing and tax strategies to enable them to make their sale offerings more attractive to a broader audience. For example, let's take the case of a buyer who needs immediate occupancy in order to register a child in a desired school district. The seller can agree, subject to a reasonable up-front Option payment and a qualifying credit check, to a Lease/Purchase contract, subject to the buyer's qualifying for a mortgage loan and completing the purchase within 120 days. This would help both parties.
In a situation in which the buyer had to sell his former residence prior to qualifying for a new loan, this would give him time to accomplish this. Suppose this happened at the end of August just when school classes were starting. The buyer's kids would get into classes without missing a beat. Let's see how this would help a seller. The closing could take place in January. For tax purposes, that would move any gain into the next year.
A seller can sell a buyer an Option to extend the holding period on an investment house out to 18 months so as to get long term capital gain treatment. In the interim, he could continue to use it in his trade or business, or rent it out. A large Option payment would give the seller the use of the cash prior to completion of the sale, and would motivate the buyer to complete the sale. The economic benefits could be negotiated between the parties, and be reflected in the price or terms of the transaction.
Investors don't like work or risk. The prospect of managing rental property is what keeps many people out of real estate income investments. But, suppose it were possible to buy a property at a deep discount at a bargain price to be sold much later in much the same manner as you might buy a zero-coupon bond. In the interim, it would require no management or maintenance, payment of taxes or insurance. When eventually sold, profits would be taxed at capital gains rates.
Use of title-holding timing strategies can create these benefits for investors, and still permit a seller the full use, possession, and ownership of what he's sold.
