Total Loss after Fire/1031 Exchange

I recieved a check for the full insured valueof 35K after a fire caused total loss.
I am selling the charred remains for 9K (owner financed)- It’s fixable and half the duplex is livable.

I normally use Lease Options to “Sell”, but I think I will do a more traditional owner financed, so I can get this house out of my name.

I asked my Tax guy about 1031 exchanges. He told me that since it was a total loss fire damage, I have 2 years rather than 45 days to identify a new property.
I am relatively small, and would like a bit more time than 45 days. Would doing a Lease Option buy me more time on the 45day clock?
Do I actually have 2 years? Was my tax guy actually referring to a 1033 not a 1031?

It is clear that this situation migth be over my head, and I am not confident in my current tax guy handling this. Any reccomendations for national companies handling 1031 exchanges?

I live in central IL

From my experience, you will be leasing the property, so the deed will not be transferred, so are you actually selling the property?

I am undecided if I will be doing lease-option or owner finance. I understand the difference in title transfer. My questions were in regards to how a tax advantaged exchange could be effect by the deal structure.


Ok, let’s see if I understand this completely? You have a fire on a property probable worth $60k in which you receive $35k from the insurance company to cover the repairs? So instead of repairing the property with the $35k you have decided to pocket the money and sell the property?

So I assume you paid cash for this property originally or had it paid off prior to the fire?

Now a 1031 exchange works by you listing your property for sale IE: $60K asking price and if you except for example $56k as the purchase price then your settlement funds at close of escrow don’t go to you but go to your 1031 exchange custodian to be held until you select a new property and the custodian sends your funds to the new properties escrow title settlement company for your new purchase.

Now any left over funds after a new purchase becomes taxable income as capital gains.

Now when you have a fire and you collect a insurance check you have to look at your cost basis since you paid cash! If you bought the property all cash 5 years ago for $40k and the property appreciated $20k dollars to a value of $60k over 5 years then the $35k insurance check you received is tax free as it is the recovery of principle dollars you had already paid out.

However the $35k insurance check can only do 2 things either go in your pocket or pay the fire damage repairs for the property! The $35k can not be 1031 exchanged because you did not receive it in a sale! Now let’s say for instance you only paid $25k for this property 10 years ago and you receive $35k you decided to pocket rather than repair then you will have a $10k tax burden as capital gains however this $10k can not be 1031 exchanged because you did not receive it from a sale and did not have it held by a custodian to exchange.

Now you said you would like to sell this property for $9k on owner financing, so this $9k is not 1031 exchange able as carrying paper is not receiving cash capital from escrow at close of sale! There is nothing to exchange! And lease optioning does not create a sale until the option is executed and the property bought.

Now the option being exercised creates $9k at closing, this theoretically could be 1031 exchanged but geese why would you? I mean after all $9k is less than $2k in state and federal taxes and is roughly the down payment on a $40k property. You will probable make more from the lease the next 2 or 3 years than the $9k in principle.

The only way you create a property where the whole cash sale amount is 1031 exchange able is repairing the property and then making a sale that provides full value at close of escrow.

Then make sure you set up a 1031 exchange custodian to receive your settlement and hold it (escrow it) until you select another property. Your selection must be made within 45 days of close of escrow.