1031 exchanging into an REO

[Randy King]

Anyone have experience buying an REO as your replacement property in a 1031 exchange? The language that has to go into the buy contract allowing the 1031 will probably not be allowed by HUD or FNMA. Any ideas?

[Ryan Thomas]

The IRS requires the contract be assignable. In many cases, the banks will not allow this for REO's, foreclosures, and short sales. Also, not as common, but sometimes the banks/firm handling the transaction will not accept funds from a third party (QI), so when the funds are sent, they may be rejected and returned to the QI..

That said, people do aquire these types of properties in a 1031 exchange all day long. It is important to have their legal/tax advisors review the transaction, determine the risk if they were ever audited, and if they decide it is worth it an believe they could defend it to the IRS in an audit, they go ahead with it.

Another issue you may run into is complying with the exchange timelines, especially in the case of short sales, as they may take a long time to close, and the total exchange period is 180 days.

http://apiexchange.com/tax_and_legal_updates/legal_and_tax_updates/Legal%20and%20Tax%20Update%20Newsletter-Volume%209.pdf

http://www.apiexchange.com/articles/pdf/Distressed%20Property%20Acquisitions%20in%20an%20Exchange%20(159).pdf