Lease Options and Income Tax

If you do a simultaneous closing between the rent to own buyer and the rent to own seller, with you in the middle as the lease option investor. This is considered a short term capital gain, no matter how long the option period. Short term capital gains tax at the highest rate.

One great option for reducing your tax, or paying no tax at all when you sell that lease option investment is a 1031 tax deferred exchange. This is a more advanced concept in your lease option training.

A 1031 exchange is an excellent way to defer your taxes and capital gains by taking the profit of your sale and rolling it into a property of higher value, or two or more properties whose combined value is higher than your sale. A 1031 tax deferred exchange is a great tax strategy, but this takes a bit of planning and foresight because there are time limits to make this happen. In other words, at the time of sale you should have a property lined up already into which you can roll the money.

As the lease option investor, you won't actually handle the money yourself. A company that does 1031 exchanges will play what is called the intermediary between the current sale and the new property and will move the money from one closing to the next for you. It has to be done very carefully and with a good company or the IRS might not allow the exchange. You can't touch the money. You also can't live in the new, higher-valued property or in any of the combined properties that are in total a higher value. You need to rent the properties or hold them as an investment since a 1031 is for investment exchanges and not personal residences.

This strategy can be used when you need to defer your capital gains. When you are first starting out in the lease option investing business, you might not need this, but down the road it can come in handy.

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