Acquiring Distressed Property in a 1031 Tax-Deferred Exchange

by 22 Jul 2012
Real estate investors are purchasing properties at steep discounts by utilizing techniques such as short sales, courthouse step sales, and purchasing bank-owned properties (REO). While these approaches can often provide excellent buying opportunities, buyers who engage in 1031 tax-deferred exchanges must pay extra attention to the details of their particular acquisition, as each of these approaches can present difficulties in completing a successful 1031 exchange. The important point to realize is that each of these approaches has unique issues that must be understood and addressed early on. Some of the problems include:
  1. Problems meeting the 180-day exchange period deadline due to inability to control the closing of the purchase. This is a common problem, particularly with short sales. Prudent exchangers will minimize this risk by taking full advantage of the 45-day identification rules. In short, you are on the seller's time schedule, not on yours.
  2.  These transactions often have rigid structures. As such, you may have difficulty complying with 1031-specific requirements, including contract assignability and deeding flexibility. Often, sellers in these situations are not willing to respect the need for slight modification to their "procedure" to effectuate a technically valid 1031 exchange.
  3. In the case of courthouse step purchases, advanced planning is necessary, as cashier's checks must accompany the winning bid at the time of the purchase. You will not know what the final winning bid figure will be, therefore it is prudent to have multiple cashier's checks in appropriate increments ready. Of course, all cashier's checks must be immediately returned to the qualified intermediary if you are not the winning bidder.
Many of these problems can be overcome with advanced planning and creative structuring. In many cases, the use of an Exchange Accommodation Titleholder (EAT) can allow for creative techniques such as using exchange proceeds for capital improvements after the replacement property has been acquired, and acquiring multiple properties before or after the relinquished property has been closed.    Cris Anderson, Esq. is the Northwest Division Manager of Asset Preservation, Inc., and may be reached at (877) 909-1031 or cris@apiexchange.com should readers have additional questions.

COMMENTS

  • by William Matz | 7/23/2012 5:58:39 PM

    Good article. The timing and process requirements of foreclosures and REO sales virtually mandate use of Starker or even reverse Starker exchanges. Of course, the fact that REO is neccessrily free and clear makes it difficult to do 1031 without triggering "boot" from relief of debt, as most property being sold has some debt on it..

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