Should i pay more than the agreed upon price?

Question

Hello BP community, sorry in advance if the forum is wrong but it doesn't seem like it fits in Legal.

I'm closing on a property early next month and i have a couple questions regarding changing the purchase price.

This will be a cash purchase, some of the funds will be from a 1031 account, and rest will be from personal. The purchase of the "new" investment under 1031 exchange regulations must be equal to or more than the previous investment which is 165k.

Is it possible/legal for the purchase contract to be more than agreed upon price and have the seller give me a refund at closing? The agreed upon price comes in quite a bit lower than the appraisal value. Would this work to get me closer to the 165k to help meet the requirements for the 1031 exchange?

For example - Say we agreed the purchase price was 30k and the appraisal comes in at 60k. Would it be possible/legal to change and/or write a new purchase contract that states ill pay 60k for the property but the seller will give me 30k back at closing?

If the above example is legal, would it also be legal to pay more than the appraised value and have the seller refund the difference at closing? Are there any limits to this type of transition? Any down sides to the seller as far as tax obligation?

Mark Creason · Answer

@Ryan Melander

If you had a sale of 165k, but bought for 150k, you would have 15k boot. This is pretty simplified. You might have expenses which would lower the boot. You would pay taxes on the boot of 15k. Not your 65k. Hope this makes sense.

Mark

Dave Foster · Answer

@Ryan Melander, An audit of a 1031 if it ever happens will focus on documentation and timing of the 1031, arms lengthness of the transaction, and chain of custody of the proceeds. The appraisal value of a property is not likely to enter the discussion as that is only a determiner of loan value and there's always circumstances that warrant a less than or more than appraisal offer. Some closing costs as well as potentially certain concessions can be made to work.

Dave Foster · Answer

@Ryan Melander, Any cash that comes back to you over or under the table is boot and would be taxable. Hopefully your QI concurs. Best case is that the cash portion is taxable. Worst case is that your entire exchange is disallowed.

There are a few ways to slightly inflate the purchase price to accommodate 1031 reinvestment requirements. But nothing that involves cash coming back to you.

Ryan Melander · Answer

@Mark Creason forgive me i don't quite follow.

Lets say for example if the initial investment sold for 165k. The cash received after paying all expense is 65k which goes into a 1031 exchange.

The new investment must equal 165k or I pay taxes on the 65k? Or is there any circumstance stance where i would pay partial tax on the 65k if i don't meet the replacement value (165k in this example) set forth by the 1031 exchange account?

Mark Creason · Answer

@Ryan Melander

If you had 50,000 in boot, you would pay appropriate tax on profit up to that boot amount.

Ryan Melander · Answer

@Mark Creason good points. It sounds like what you're saying from point 1is that if i don't meet the replacement value of the original investment I will have to pay taxes on the difference? I'm under the impression if the replacement value of the 1031 exchange isn't meet I have to pay taxes on all money acquired in the sale of the original investment?

Mark Creason · Answer

@Ryan Melander

For your exchange, you need to hit 3 numbers: 1) All cash has to go back in or you have boot. 2) If you have a mortgage, you have to replace it with a new mortgage or you incur mortgage boot. 3) You have to replace the full purchase price minus closing costs with a new purchase equal or greater than that amount.

Mark

Ryan Melander · Answer

@Dave Foster, good point. I don't want to get hit with taxes over inflating a purchase for a 1031 exchange. Its it possible to inflate it without being taxed for refinance purposes as long as its not over the appraised value?

Should i pay more than the agreed upon price?

Should i pay more than the agreed upon price?

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