1031 disclosure or not?

Question

I read on our state realtor association website that you are supposed to disclose to all parties that you are doing a 1031 exchange and include wording in the contract to the effect "seller understands that buyer is doing a 1031 exchange and will co-operate in every respect. seller will not incur any additional costs by co-operating".

But I have heard from gurus that you should stay quiet about doing a 1031 because it lets the seller know that you are on a time limit then and they can use that in negotiations to get concessions out of you.

I'm not sure if this applies to the other side of the transaction too: selling the first house in the exchange.

Account Closed · Answer

As far as I know, it is the law that you disclose.  That would be federal law, so it isn't going to matter what state you are in.

Actually, it is not a disclosure for the seller or buyer, it is a declaration of intent for the IRS.

I've never had it affect a purchase or sale, either one.

David Krulac · Answer

@Robert Steele

Yes, you must disclose for several reasons.  One is for the IRS.  You are not buying a property nor selling a property when you do a Section 1031.  You are relinquishing a property and acquiring a property.  It is not a buy or a sale.

Secondly, the contract should state that it is not a buy ro sale and if you use an intermediate, they will most likely have some paperwork that the other side of the deal must sign.  This paper work will cover you in the event of an IRS audit.

You do not want the IRS unraveling your 1031 because you failed to follow the reg to the T.  It would be very costly.

Steve Babiak · Answer

A motivated seller is usually on a time crunch too.  Sometimes your buyer has time constraints too.

In any case, your agreements to sell the relinquished property and to acquire the replacement property will be assigned to the QI with an addendum that the other party involved will have to sign, so sooner or later you have to get a signature.  If they don't cooperate, what will you do?