Can you do a 1031 Exchange for an auction property?

Question

Can you do a 1031 Exchange for an auction property? Has anyone done a 1031 exchange at a foreclosure auction or any other type of auction? In most counties in my area you have until 5pm the day of the sale to pay for the property so I wasn't sure how that would work. Any info is appreciated...

Al Skerrett · Answer

Thank you both for the insight! Seems like it would be best to try a straight forward exchange first to get my feet wet then experiment with the tricky deals later...

Bill Exeter · Answer

Hi @Al Skerrett,

Yes, it can be done but buying replacement property through a foreclosure action at a Trustee's Sale, tax sale or some other type of auction is not always easy. The first issue is not the settlement or payment but the actual transaction structure.

In a regular 1031 Exchange, the Purchase and Sale Agreement is assigned to the Qualified Intermediary in order to integrate the purchase of the property into the 1031 Exchange. There are generally no Purchase and Sale Agreements that can be assigned to the Qualified Intermediary in a foreclosure action, tax sale or other type of auction.

When there are no Purchase and Sale Agreements involved, the Qualified Intermediary must go back to pre-Revenue Ruling 90-34 days where the Qualified Intermediary actually acquires legal title to each property involved in a 1031 Exchange. This means the Qualified Intermediary would bid on the property at the Trustee's Sale (usually through you as its agent) and then acquire and take legal title to the replacement property if it is the winning bidder.

Once the property has been acquired by the Qualified Intermediary, the Qualified Intermediary would then convey legal title of the replacement property to the Exchangor in order to integrate the purchase of the property into the 1031 Exchange. It is not just a matter of drafting the 1031 Exchange documents, but how to structure it so that the replacement property will qualify as being acquired by the Qualified Intermediary and conveyed to the Exchangor.

The second issue is the settlement or payment for the property if successful at the auction. Trustee's Sales, tax sales and various auctions are run differently. Some require payment immediately, some provide a few days for settlement, some provide more time. Some require cashiers checks on site, some allow wire transfers, some go through a closing or settlement process. This issue can create logistical problems for the Qualified Intermediary, and the solutions depend upon how the specific sale or auction is being run.

If the auction does involve Purchase and Sale Agreements and there is a settlement period, then it will really work like a regular Forward 1031 Exchange. If not, then the purchase is structured as described above (much like a Reverse 1031 Exchange).

Dave Foster · Answer

@Al Skerrett, You can but you've identified the big sticking point. There has to be time to transfer funds and generate the 1031 paper work. And what makes it worse is that there is no way of knowing whether or not you'll actually win or not. So it can get pretty time consuming for the QI.

The places where I've seen it succeed the most are where. you have a few days up to a month to produce funding. In that case it's no problem at all.

So in your case with some real vigilant coordination it can. But it's going to be tough.

Can you do a 1031 Exchange for an auction property?

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