Buying sheriff sale properties through reverse 1031 exchange

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Buying sheriff sale properties through reverse 1031 exchange

Kalman G Szabo
Investor · Pittsburgh, PA · Member since 2019 · 20 posts · 6 votes

Hi, I have a question about the reverse 1031 exchange that I haven't yet found an answer to on this otherwise amazing forum. Namely, would it be possible to acquire a property on a sheriff sale and use it as a replacement property in a reverse 1031 exchange?

As I understood sheriff sale and similar auction properties aren't viable as replacement properties through a straight 1031 exchange because of operational difficulties - e.g. the funds from the property sold should be held by the Qualified Intermediary (QI) who could not possibly release it on time to pay the sheriff sale dues - which are depending on your jurisdiction an up-front part and the rest be paid in a very short notice. There might be additional limitations but the short timeline is by itself prohibitive. 

But how about reverse 1031 exchanges? What would stop an investor from taking title to the sheriff sale property through an LLC set up ahead of time by a QI acting as Exchange Accommodating Title Holder and transferring ownership of the LLC itself after the property intended for sale closed?

Or is there a way to make this work even through a straight (as in, non-reverse) 1031 exchange?

@Dave Foster, I believe this question would be right up your alley!

Thanks in advance!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    Hi @Kalman G Szabo, Thanks for the shout out and you shall have your answer :)

    You're absolutely right in identifying the difficulties in using auction or sheriff sale properties.  It's not that they are prohibited.  But the timing restrictions can be too tight to manage.  Of course this differs municipality to municipality so still worth checking.

    But you're hit on a very good idea - using the reverse exchange to control the properties. first. The structure of the reverse lends itself well to this type of thing. Remember in a reverse your QI will actually take title as a special purpose entity LLC called the Exchange Accommodating Title Holder. Once they take title you have 6 months to complete the sale of of your old property. This can really ease the angst of the timing of your sale as well as all the procedural stuff surrounding a courthouse sale. But it's not without it's own hassles.

    1. The entity will have to be opened ahead of time - depending on the state it can take a couple of weeks to get the LLC set up correctly without significant rush fees. So you'll have some expenses without the guarantee of a purchase.

    2. Financing of the LLC could still be a problem. If you have to borrow money for the purchase without your 1031 sale then it almost surely can't be done. But if you've got the funds to lend to the LLC it would be possible to fund the LLC ahead of time so purchase money could be wired immediately after winning the bid.

    3. getting funds to purchase in time can still be a challenge.  Sometimes you can have days to a month to get funds transferred.  In these cases a reverse exchange would be relatively easy.  But if it's one of those "proceeds by end of day" kind of sales then it's still going to be a challenge.

    Like everything else - It solves some problems but has it's own challenges!

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