1031 exchange proceeds into tax deeds?

Question

Hello all, I was wondering if as the above says, I can use 1031 proceeds to buy either tax deeds or even tax liens. I wasn't sure because of the redemption periods and found no direct info on google. Thanks very much!

Dave Foster · Answer

@Roger Gelpey, Nope.  The 1031 exchange is a sale of investment real estate followed by a purchase of investment real estate.  Purchasing tax liens is purchasing a finance instrument.  That is not like kind.  You must both sell and buy actual real estate.

Dave Foster · Answer

@Ash Leigh, Although it's not strictly forbidden to purchase property from a related party the IRS is very skittish about it and the charge of shifting basis and step transaction is all too common.  I know accountants who are comfortable with it as long as meticulous records are kept and arms length is maintained.  But the norm if it's audited is to assume that the 1031 was flawed.  In other words you'll be presumed guilty until you prove innocence (relatively speaking of course.  It's not like it's a capital crime :)

Even over and above that through would be how you incentivize a relative to hold that property.  There would have to be an economic incentive and then that is going to involve taxes on gain etc etc.  I'ta probably not worth the effort and angst.

John Underwood · Answer

@Roger Gelpey I would say definitely not to tax liens. You are buying a tax lien and may not get the property. You will likely get your money back plus interest and no house.

Tax Deed - I would say maybe. On a Tax deed you are actually buying the property at near retail price in most cases. I would consult a 1031 certified company and check with them on this.

Mario Am · Answer

@Dave Foster thank you.

Dave Foster · Answer

Happy Thanksgiving @Mario Am!!

If you're actually selling the property itself and buying the property itself then you can use the 1031.  Of course you still have to meet the timelines.   But selling a property you've acquired in any way and buying a lien to purchase a property does not work.  It has to be a sale and purchase of actual investment real estate.

Mario Am · Answer

Hey dave, so what if I sell a tax deed property to buy another tax deed property? Does the 1031 apply?

Chris Seveney · Answer

@Ash Leigh

My understanding you cannot have the transaction involve relatives. Not an attorney or expert on this subject.

Dave Foster · Answer

@Roger Gelpey, yepper that's correct.  Once you own it you can't 1031 into it.

Roger Gelpey · Answer

@Dave Foster, Thanks for chiming in! I didn't have to wait till Monday! I am guessing that I can't use the proceeds to "buy/pay off" properties acquired in full through tax deed sale (past redemption) by an entity controlled by me into my own family trust either?

1031 exchange proceeds into tax deeds?

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