1031 exchange for a foreclosure??

We are doing a 1031 exchange, and looking into buying foreclosure property with the money. One agent told us that you couldn’t do a 1031 exchange on a foreclosure, because it takes the agreement with the seller to cooperate with the exchange. We are paying cash, and it really wouldn’t affect the bank, but we have to get their approval. We were wondering if anyone has any experience with this?

If you are doing a delayed exchange, sometimes called a forward exchange, no seller cooperation is needed other than to ratify your purchase agreement. I assume that you will be direct deeding the property rather than using your intermediary as a title transfer agent.

I have done exactly what you are describing. The REO property owner (bank) does not care that you are doing an exchange, only that you have the funds to close.

Acquiring foreclosure properties can be tricky and do pose some degree of risk, depending on the documentation.

There are two issues involved here.

One is that all of the parties involved in the transaction (buyer and seller) must be notified that the Qualified Intermediary (Accommodator) has been assigned into the transaction. This is typically accomplished by having the parties sign the “Assignment” document. However, if the other party refuses it is not the end of the world as long as you can demonstrate they were notified.

The second issue is the more critical one. The Qualified Intermediary (Accommodator) must “acquire” the property and transfer it to the Exchangor. This is accomplished by the “Assignment” document where the Qualified Intermediary is assigned into the purchase and sale contract and any escrow instructions that may exist so that legally they are now obligated to acquire title to the property and then transfer the property to the Exchangor. The property can be conveyed via a direct deed pursuant to Revenue Procedure 90-34, but the Qualified Intermediary must still acquire the title and give the direction to direct deed via the assignement. In foreclosure sales/trustee sales, there is typically no contract and no escrow instructions, so it is impossible for the Qualified Intermediary to “assign” themselves into the transaction. There are some solutions to this issue, but not of them are full proof, except by acquiring legal title. We often recommend having the Qualified Intermediary NOT direct deed, actually acquire legal title, and then convey to the Exchangor so that one can argue to the IRS that the QI did in fact acquire the title (not assigned in, but actually took title) and then conveyed the property to the Exchangor.