Difficult 1031 Exchange - Help Needed

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Difficult 1031 Exchange - Help Needed

Chheang Yang
Investor · Santa Clara, CA · Member since 2014 · 20 posts · 2 votes

I've got an interesting 1031 I'm trying to work through.  Hopefully someone with in depth 1031 experience can help out.  I'm selling my home and it's going through as a 1031 exchange.  I plan to close 7/30/2016.  However, I just saw a home for sale and seller is incredibly motivated and wants a cash close 7/26/2016.  They're willing to hold off on transferring title until 8/1/2016.  I can come up with the cash to close on 7/26/2016, but I'm curious if there's any way to make this work so that it is covered by the 1031 exchange.

I see a few problems with this:

1. Cash from the sell of the home is going into the exchange agency's system and is expected to be used for the purchase of the new home.

2. I'll pay cash for the new home on 7/26/2016 and the seller will hold off on transferring title until 8/1/2016.  However, how do i get money out of the 1031 escrow account since the home is already paid for?

Any thoughts on how to make this work?  Thanks!

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Shannon Wright
Escrow Officer · Temecula, Ca. · Member since 2016 · 418 posts · 152 votes
10y

If this is still a topic at such a late date, here is my thought:

There is a such thing as a reverse exchange, which will allow you to buy and then 1031. You need to talk to an accommodator who can handle that. :)

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Chheang Yang, The statutory requirements of 1031 force you to relinquish (close sale) of your old property before taking title to the new property.  If you pass cash to purchase it will not matter when the deed is recorded.  There will be a settlement statement accounting for the cash going to the seller to purchase.  This means that "risk of loss" has passed and the property is in essence yours. 

    it seems a shame to do this with only a 4 day lag from purchase to sale but a reverse exchange is one option.  Your Intermediary forms a holding entity and takes title to the new property and holds it until you close the sale of your old property.  The problem with reverse exchanges are that they cost quite a bit more and of course are more complicated.  But that would be a viable option for you.

    Your best option is a an escalation of your sale for consideration or a delay of the purchase again for consideration.  You can place a significant amount of non-refundable earnest money and even release it if you want to make the seller comfortable.  At the closing of the purchase then your earnest money goes back to you and is replaced on the settlement statement with 1031 proceeds.

    It is even possible to do the sale and purchase back to back with the funds wired directly from the sale to the purchase bypassing the intermediary's account if that kind of haste is called for.

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  • Chheang Yang
    OP
    Investor · Santa Clara, CA · Member since 2014 · 20 posts · 2 votes
    10y

    @Dave Foster 

    @Dave Foster, thanks for the quick reply.  I considered the reverse 1031, but the cost is prohibitive for the deal I'm looking at.  I saw your other 1031 posts and it looks like this is the business you know in-depth.  I like your suggestion of a considerable deposit.  Do you think I could put a 100% deposit?  The seller has no problem holding the title, but wants cash now because he's purchased the home using hard money.  My problem is that I can't figure if I were to put a 100% deposit, how to get the money out of the escrow exchange company when the home finally closes.  Thoughts?

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    I don't care what kind of rates he's paying, 5 days of interest is irrelevant....may be other issues.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Chheang Yang,  A 100% deposit ahead of closing is not unheard of.  If you can schedule the closing for 8/1 with a deposit of 100% placed in escrow then when you close your sale on 7/30 proceeds go directly to the purchase.  The settlement statement on 8/1 reflects the correct amount of exchange proceeds transferred in and it also contains a line called "return of earnest money" so your money comes back to you.

    The potential problem is the reasonability of a 100% deposit that is released to the seller ahead of the recording of the deed.  The risk of owning that property has passed from the seller to you when that large of an amount changes hands.  It would be hard to argue it as just a deposit,  

    I agree with @Wayne Brooks, there's something else going on if all he's concerned about is interest of a few days.  That is an objection that could be easily overcome.  And, just thinking out loud but , what is the likelihood of him finding a buyer to close 7/26?  Seems to me you have a pretty powerful position.

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  • Chheang Yang
    OP
    Investor · Santa Clara, CA · Member since 2014 · 20 posts · 2 votes
    10y

    I really thank you for the concern.  I assure you, there's no scam on this.  The short duration is purely the nature of the deal.  I've worked with the seller in the past.  He's actually a pretty regular business contact.  He purchased the home at auction and wants it offloaded (usually same-day).  This is a rare one because by the time I told him I wanted the home, he had already offered it to someone else.  However, they backed out this AM.  I figured, here's the second chance.  If I don't give him the cash (call it deposit or whatever), he'll simply sell it to the next person.  The discount is pretty big (50k below market) which is what makes it worth the hassle.

    Yeah, there's no escrow agent in this.  I would normally just wire money directly to his account.  Can a "deposit" be given directly to the seller?  I fear the answer is that an "escrow account" is necessary.  Thanks again for all the advice.

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  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    10y
    Would it be permissible to option the property for five days for $1000 or so?
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  • Shannon Wright
    Escrow Officer · Temecula, Ca. · Member since 2016 · 418 posts · 152 votes
    10y

    If this is still a topic at such a late date, here is my thought:

    There is a such thing as a reverse exchange, which will allow you to buy and then 1031. You need to talk to an accommodator who can handle that. :)

    1Reply
  • Chheang Yang
    OP
    Investor · Santa Clara, CA · Member since 2014 · 20 posts · 2 votes
    10y
    Originally posted by @Shannon Wright:

    If this is still a topic at such a late date, here is my thought:

    There is a such thing as a reverse exchange, which will allow you to buy and then 1031. You need to talk to an accommodator who can handle that. :)

     Thanks.  I did look into it and the fees are cost prohibitive.  All good though... found a solution.  Thanks!

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