Dec
26
puffinpower asked:
My husband and I are looking for a single family home to purchase as our primary residence. An ad for a home that looks appealing to us indicates: “Buyer to participate in 1031 exchange.” I understand the basic principle that a 1031 exchange is a way for the owner of a business or investment property to sell the property and re-invest the money in a new business or investment property without having to pay capital gains taxes on the sale of the original property. However, what I don’t understand is what the risk, if any, would be to me and my husband were we to purchase someone’s investment property as our primary residence in this type of situation. Is it simply a matter that we would have to agree to be in escrow until the seller locates and purchases his “like-kind” exchange property? Or is there more to it than that?
Neil
My husband and I are looking for a single family home to purchase as our primary residence. An ad for a home that looks appealing to us indicates: “Buyer to participate in 1031 exchange.” I understand the basic principle that a 1031 exchange is a way for the owner of a business or investment property to sell the property and re-invest the money in a new business or investment property without having to pay capital gains taxes on the sale of the original property. However, what I don’t understand is what the risk, if any, would be to me and my husband were we to purchase someone’s investment property as our primary residence in this type of situation. Is it simply a matter that we would have to agree to be in escrow until the seller locates and purchases his “like-kind” exchange property? Or is there more to it than that?
Neil
Comments
No Responses to “What’s the risk to the buyer of somone’s 1031 exchange property?”
It could be a great bargaining tool. Someone needs you to get in on this property with them because they need to put their money somewhere so that they don’t get taxed on it. The only risk could be how long your money could be tied up or pre-payment penalties because that person may not want that property to get sold or they could have to pay their capital gains taxes. So they want you to hold onto that mortgage for as long as possible, so refinancing could be a problem down the line. Look into that. But when your negotiating you could negotiate a good deal because they need you.
Generally with 1031’s it is advised that all parties involved are informed from the beginning of the transaction. That may be why it is being advertised. I think that the seller is just putting a disclaimer in the ad to conform to the tax law.
Money transfer from your perspective will be handled the same way as it would be in a normal transaction. At the closing table you will either sign loan documents or pay cash for the transfer of title on the property.
At that point the seller will have to handle the proceeds differently(usually through an intermediary) than they would normally be handled. This in no way effects you.
Once you have bought the house you own it. If the seller doesn’t find a “like-kind” property, he will not get the tax break on any realized capital gains from that property, but in no way will this effect the title of the property you purchased.
It doesn’t matter how you and your husband use the property purchased in a 1031 for it to conform to 1031criteria for the seller. I.E., if the seller was using a property as an investment property but you intend to use it as a primary residence, the seller is still entitled to claim that property as an investment property for 1031 purposes.
The intent of a seller selling a property for the purpose of a 1031 exchange should have a very little to zero effect on the purchaser of the property