Homebuyer wants me to do a 1031 exchange. Um, what?

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fredflinstone
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Homebuyer wants me to do a 1031 exchange. Um, what?

Post by fredflinstone » Fri Oct 18, 2019 6:35 pm

I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by whodidntante » Fri Oct 18, 2019 6:48 pm

It means the buyer is an investor, has also sold a property, and wants to defer capital gains tax. I don't think you should object.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by jucor » Fri Oct 18, 2019 6:49 pm

fredflinstone wrote:
Fri Oct 18, 2019 6:35 pm
I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?
It might be ok, or it might not. There are a set of rules hat must be followed. What did your real estate agent say? What did your real estate attorney say? I would not enter into this without an attorney.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by arcticpineapplecorp. » Fri Oct 18, 2019 6:50 pm

are you using a realtor to sell your home? If so, have you talked with your realtor about this?

sounds like he's trying to sell a "like" property and buy this one and avoid capital gains taxes on the sale of the property he's intending to sell. This generally relates to investment properties and some vacation homes. Is the buyer intending to rent out your home after he acquires it?
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by MillennialFinance19 » Fri Oct 18, 2019 6:51 pm

I’m by no means an expert, but in short, he’s purchasing the property with proceeds from a similar property sale. This is done by placing the funds with an intermediary while he waits to identify another property to purchase - in this case, yours. Shouldn’t impact you one bit.

It’s a tax move commonly done by people turning properties frequently. I was going to do one earlier this year but couldn’t identify my replacement property within the 45 day timeline.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by alex_686 » Fri Oct 18, 2019 6:52 pm

The homebuyer wants this to defer capital gains. Basically if you swap one property for another you can carry the cost basis of the first instead of recognizing capital gains of selling that property. This is all legit and above board. 1031 is the tax code.

No idea on how it would impact you. I can’t think if anything but I haven’t done one myself.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by MillennialFinance19 » Fri Oct 18, 2019 6:52 pm

arcticpineapplecorp. wrote:
Fri Oct 18, 2019 6:50 pm
are you using a realtor to sell your home? If so, have you talked with your realtor about this?

sounds like he's trying to sell a "like" property and buy this one and avoid capital gains taxes on the sale of the property he's intending to sell. This generally relates to investment properties and some vacation homes. Is the buyer intending to rent out your home after he acquires it?
Most realtors won’t know what a 1031 exchange, much less the fine mechanics of it. Certain CPAs typically specialize in this area.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Silk McCue » Fri Oct 18, 2019 6:55 pm

As long as it doesn’t change the closing date you don’t care. They just need paperwork in place for the IRS.

Edit to add: Tell them you will sign it at closing in a week and see what they say.

Cheers
Last edited by Silk McCue on Fri Oct 18, 2019 7:12 pm, edited 1 time in total.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Northern Flicker » Fri Oct 18, 2019 7:06 pm

MillennialFinance19 wrote:
Fri Oct 18, 2019 6:52 pm
arcticpineapplecorp. wrote:
Fri Oct 18, 2019 6:50 pm
are you using a realtor to sell your home? If so, have you talked with your realtor about this?

sounds like he's trying to sell a "like" property and buy this one and avoid capital gains taxes on the sale of the property he's intending to sell. This generally relates to investment properties and some vacation homes. Is the buyer intending to rent out your home after he acquires it?
Most realtors won’t know what a 1031 exchange, much less the fine mechanics of it. Certain CPAs typically specialize in this area.
Any competent realtor will know what a 1031 exchange is.
Index fund investor since 1987.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Dottie57 » Fri Oct 18, 2019 7:22 pm

Make sure youread and understand any document you sign. Not sure why you need to sign anything.

This is from a realty site. 1031.us. From a google search.

https://www.1031.us/library/contract-addendums/

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by fredflinstone » Fri Oct 18, 2019 7:38 pm

jucor wrote:
Fri Oct 18, 2019 6:49 pm
fredflinstone wrote:
Fri Oct 18, 2019 6:35 pm
I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?
It might be ok, or it might not. There are a set of rules hat must be followed. What did your real estate agent say? What did your real estate attorney say? I would not enter into this without an attorney.
I have a Realtor. She has never seen this form before. She is looking into it.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by fredflinstone » Fri Oct 18, 2019 7:39 pm

arcticpineapplecorp. wrote:
Fri Oct 18, 2019 6:50 pm
are you using a realtor to sell your home? If so, have you talked with your realtor about this?

sounds like he's trying to sell a "like" property and buy this one and avoid capital gains taxes on the sale of the property he's intending to sell. This generally relates to investment properties and some vacation homes. Is the buyer intending to rent out your home after he acquires it?
My Realtor has never seen this form before.

I think the home will be rented out, but am not sure.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by fredflinstone » Fri Oct 18, 2019 7:40 pm

Northern Flicker wrote:
Fri Oct 18, 2019 7:06 pm
MillennialFinance19 wrote:
Fri Oct 18, 2019 6:52 pm
arcticpineapplecorp. wrote:
Fri Oct 18, 2019 6:50 pm
are you using a realtor to sell your home? If so, have you talked with your realtor about this?

sounds like he's trying to sell a "like" property and buy this one and avoid capital gains taxes on the sale of the property he's intending to sell. This generally relates to investment properties and some vacation homes. Is the buyer intending to rent out your home after he acquires it?
Most realtors won’t know what a 1031 exchange, much less the fine mechanics of it. Certain CPAs typically specialize in this area.
Any competent realtor will know what a 1031 exchange is.
Mine does not.

alex_686
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by alex_686 » Fri Oct 18, 2019 7:45 pm

Every realtor I know knows what a 1031 exchange is. This might be a comment on yours. It implies that they have never delt eith somebody buying or selling a rental property, and have skipped a good part of real estate tax management classes that most take.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by AerialWombat » Fri Oct 18, 2019 8:09 pm

fredflinstone wrote:
Fri Oct 18, 2019 6:35 pm
I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?
This is normal. The IRS requires the identification of a replacement property within 45 days of selling the previous, and the paper trail requirement for "identification", while not strictly defined, must be more than just notifying the Qualified Intermediary handling the 1031 (the money person, often a CPA). So, it has become quite customary to have the seller sign an acknowledgement of the 1031 to meet the "identification" requirement.

It has no impact on your purchase agreement, closing date, etc.
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by MillennialFinance19 » Fri Oct 18, 2019 8:14 pm

Northern Flicker wrote:
Fri Oct 18, 2019 7:06 pm
MillennialFinance19 wrote:
Fri Oct 18, 2019 6:52 pm
arcticpineapplecorp. wrote:
Fri Oct 18, 2019 6:50 pm
are you using a realtor to sell your home? If so, have you talked with your realtor about this?

sounds like he's trying to sell a "like" property and buy this one and avoid capital gains taxes on the sale of the property he's intending to sell. This generally relates to investment properties and some vacation homes. Is the buyer intending to rent out your home after he acquires it?
Most realtors won’t know what a 1031 exchange, much less the fine mechanics of it. Certain CPAs typically specialize in this area.
Any competent realtor will know what a 1031 exchange is.
Keyword: competent. A lot of people dive into realty and wash out in 2-3 years. An experienced realtor should know. You’re correct. Sorry for the lack of clarity.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ARoseByAnyOtherName » Fri Oct 18, 2019 8:17 pm

fredflinstone wrote:
Fri Oct 18, 2019 7:39 pm
arcticpineapplecorp. wrote:
Fri Oct 18, 2019 6:50 pm
are you using a realtor to sell your home? If so, have you talked with your realtor about this?

sounds like he's trying to sell a "like" property and buy this one and avoid capital gains taxes on the sale of the property he's intending to sell. This generally relates to investment properties and some vacation homes. Is the buyer intending to rent out your home after he acquires it?
My Realtor has never seen this form before.

I think the home will be rented out, but am not sure.
You should hire a real estate attorney to make a legal assessment as to how you should proceed.

Your Realtor could tell you that this is fine, or it's not fine, or that unicorns are purple. If she doesn't know already would any of that make you feel any better?

Based on other comments here it sounds like this is fairly routine. If so honestly you could probably call up a real estate lawyer, talk to them on the phone for 3 minutes, and they might say "this is standard, you don't need to hire me, sign it and move on". Or they might say "go talk to a real estate accountant". Or maybe "sure I can review the documents and contract and tell you, it'll be $300", in which case you've paid a (relatively) very small amount of money for peace of mind.

EDIT: in my state you are required by law to retain a lawyer for the purchase or sale of a house. When I bought a house recently the lawyer fee was quite modest. Plus I learned a lot about the history of the house from the title research that they did.

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ResearchMed
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ResearchMed » Fri Oct 18, 2019 8:22 pm

How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by BSBHead » Fri Oct 18, 2019 8:37 pm

fredflinstone wrote:
Fri Oct 18, 2019 6:35 pm
I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?
I've worked on these in a commercial setting and they can be complicated. I'm guessing this has to do with deferring prior gains on a rental property. You need a lawyer, someone with an LLM, and/or a tax CPA instead of a realtor and you need the buyer to pay for your legal. The buyer is already paying for the 1031 structure, so there shouldn't be opposition more legal/tax costs given the tax deferral.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by BillyK » Fri Oct 18, 2019 10:01 pm

The only thing to worry about is that your agent is unfamiliar with a 1031 exchange. They are very common and should not cause you concern once someone clearly explains it to you. Usually, you have a solid buyer and they are also under the gun to purchase like kind replacement property or properties within a limited time frame. Just what you want if you are a seller.

Yes, it is necessary for the seller to sign a purchase agreement and/or exchange addendum as part of the sale. Your agent’s broker should easily be able to explain the why of it to you. They aren’t complicated at all from the perspective of a seller. If you have a good buyer, don’t let them get away due to the 1031 exchange. The purpose of them is to facilitate the purchase of real estate while deferring tax gains. They aren’t setup to make it difficult to purchase real estate since that is exactly the purpose.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by WildBill » Fri Oct 18, 2019 10:20 pm

Howdy

The exchange addendum is for the buyer to document the purchase through a qualified intermediary so that he has a legit 1031 exchange. He needs it to document the 1031 in case the IRS comes calling.

This should all be transparent to you. As seller your role in it is to sign the form acknowledging the sale to the intermediary and get your check. Just another item in closing.

If your agent has not or can not explain this to your satisfaction, or is unfamiliar with it, you have a clueless or incompetent agent. 1031s are not rare. I have done about 6, as both buyer and seller.

Happy closing

W B
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by LeeMKE » Sat Oct 19, 2019 2:20 am

Former CA RE broker: Just sign the paper. Read it. This only acknowledges that a third party (you) agrees that the price and terms are what is already agreed to in your purchase agreement. SOP for the IRS. You are just an extra set of eyes. No need for an attorney (who often don't know anything about 1031 exchanges either.)
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by hoffse » Sat Oct 19, 2019 6:17 am

I am a lawyer with an LLM in tax. While I can’t give you legal advice, I can give you a suggestion: don’t bother hiring a tax lawyer for this on the sale side. Like others have said, it’s really just an acknowledgement form the buyer needs in case there is ever an audit by the IRS for the purchase of this house. It’s not your problem if that happens, and you would be wasting time and money paying the hourly rate of somebody who does this professionally.

What you do need to know is that the buyer is on the clock to identify a new property and then close the sale, so if you delay now because of this form you may cause them big problems. That’s probably why they didn’t tell you about this until the other terms were negotiated. If you had understood that they needed to identify a new property within a limited period of time, perhaps you would have asked for a higher price.

Actually, scratch that. This should have been your realtor’s job. She should have known what 1031 exchanges are and thought it very possible that when an investor is looking to buy your house for rental income, that this same investor is on the clock to identify and then close the purchase of the new property. This should have given you/her leverage in negotiations. Section 1031 has been around for a very long time.

Frankly, you don’t need a tax lawyer. You need a competent realtor, and I question whether you have one.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by JBEB » Sat Oct 19, 2019 7:09 am

fredflinstone wrote:
Fri Oct 18, 2019 7:38 pm
jucor wrote:
Fri Oct 18, 2019 6:49 pm
fredflinstone wrote:
Fri Oct 18, 2019 6:35 pm
I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?
It might be ok, or it might not. There are a set of rules hat must be followed. What did your real estate agent say? What did your real estate attorney say? I would not enter into this without an attorney.
I have a Realtor. She has never seen this form before. She is looking into it.
You should probably get a new realtor. Im not trying to be harsh on that one either

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ChrisC » Sat Oct 19, 2019 7:39 am

hoffse wrote:
Sat Oct 19, 2019 6:17 am
I am a lawyer with an LLM in tax. While I can’t give you legal advice, I can give you a suggestion: don’t bother hiring a tax lawyer for this on the sale side. Like others have said, it’s really just an acknowledgement form the buyer needs in case there is ever an audit by the IRS for the purchase of this house. It’s not your problem if that happens, and you would be wasting time and money paying the hourly rate of somebody who does this professionally.

What you do need to know is that the buyer is on the clock to identify a new property and then close the sale, so if you delay now because of this form you may cause them big problems. That’s probably why they didn’t tell you about this until the other terms were negotiated. If you had understood that they needed to identify a new property within a limited period of time, perhaps you would have asked for a higher price.

Actually, scratch that. This should have been your realtor’s job. She should have known what 1031 exchanges are and thought it very possible that when an investor is looking to buy your house for rental income, that this same investor is on the clock to identify and then close the purchase of the new property. This should have given you/her leverage in negotiations. Section 1031 has been around for a very long time.

Frankly, you don’t need a tax lawyer. You need a competent realtor, and I question whether you have one.
I agree with this, but I also think the seller here needs to become better educated about this situation. As buyers, we did did a 1031 exchange several years ago with clueless sellers, like the OP here. It was so frustrating in our case even though there were competent realtors informing the sellers that this wasn't a very big deal, after we ourselves (two lawyers who painstakingly walked the sellers about the procedure from our end), and the sellers were actually renting back from us! Unfortunately, the sellers thought we were doing something nefarious and possibly implicating them in some tax fraud scheme -- they wasted money and went out an hired an attorney to advise them that the 1031 exchange was no big deal to them. It was so frustrating to us because when the sellers told us they wanted to rent back from us -- it opened up the possibility of a 1031 exchange for rental property we had, we explained what we wanted to do, put the rental on the market quickly and timed the exchanges to occur within 2 days of each other -- only to have the clueless sellers start questioning us about the 1031 after we signed a contract with them.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by student » Sat Oct 19, 2019 7:54 am

ChrisC wrote:
Sat Oct 19, 2019 7:39 am
hoffse wrote:
Sat Oct 19, 2019 6:17 am
I am a lawyer with an LLM in tax. While I can’t give you legal advice, I can give you a suggestion: don’t bother hiring a tax lawyer for this on the sale side. Like others have said, it’s really just an acknowledgement form the buyer needs in case there is ever an audit by the IRS for the purchase of this house. It’s not your problem if that happens, and you would be wasting time and money paying the hourly rate of somebody who does this professionally.

What you do need to know is that the buyer is on the clock to identify a new property and then close the sale, so if you delay now because of this form you may cause them big problems. That’s probably why they didn’t tell you about this until the other terms were negotiated. If you had understood that they needed to identify a new property within a limited period of time, perhaps you would have asked for a higher price.

Actually, scratch that. This should have been your realtor’s job. She should have known what 1031 exchanges are and thought it very possible that when an investor is looking to buy your house for rental income, that this same investor is on the clock to identify and then close the purchase of the new property. This should have given you/her leverage in negotiations. Section 1031 has been around for a very long time.

Frankly, you don’t need a tax lawyer. You need a competent realtor, and I question whether you have one.
I agree with this, but I also think the seller here needs to become better educated about this situation. As buyers, we did did a 1031 exchange several years ago with clueless sellers, like the OP here. It was so frustrating in our case even though there were competent realtors informing the sellers that this wasn't a very big deal, after we ourselves (two lawyers who painstakingly walked the sellers about the procedure from our end), and the sellers were actually renting back from us! Unfortunately, the sellers thought we were doing something nefarious and possibly implicating them in some tax fraud scheme -- they wasted money and went out an hired an attorney to advise them that the 1031 exchange was no big deal to them. It was so frustrating to us because when the sellers told us they wanted to rent back from us -- it opened up the possibility of a 1031 exchange for rental property we had, we explained what we wanted to do, put the rental on the market quickly and timed the exchanges to occur within 2 days of each other -- only to have the clueless sellers start questioning us about the 1031 after we signed a contract with them.
I don't understand the negative attitude towards the seller. It was not something that he/she was familiar with and while a 1031 exchange is not uncommon, it is not exactly common either. I have heard of it but I do not know the details. Why is it not prudent for the seller to talk to his/her attorney? He/she can only be sure that his/her attorney (not the realtors) is there to protect his/her interests. Your situation may be different from the OP's. In the OP's case, they have a contract first, then the buyer presented an addendum a week before closing.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by jfn111 » Sat Oct 19, 2019 7:58 am

I just handled a 1031 exchange for a seller last week. He closed on the sale in the morning and bought the new property in the afternoon. There was an RE Attorney involved but this was only for my client to handle the escrow of the funds between purchases. It should have no impact on the seller.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Spirit Rider » Sat Oct 19, 2019 8:02 am

JBEB wrote:
Sat Oct 19, 2019 7:09 am
You should probably get a new realtor. Im not trying to be harsh on that one either
No, but you don't understand the selling of properties. The seller has certainly signed an exclusive contract with their real estate agent. They can not just "get a new realtor". The realtor is entitled to their commission now no matter what.

As stated, there may be closing time constraints on the buyer and the seller has to sign an acknowledgement form. This mostly involves the actual terms of the purchase and sales transaction. Whoever is facilitating the closing will surely understand a 1031 exchange on the part of the buyer.

The fact that it is the seller's real estate agent's first exchange is not important. It is the buyer who needs competent people on their side and to fully understand the IRS requirements. The seller only needs to understand that this is a standard legal and legitimate process. It does not materially affect them.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Longdog » Sat Oct 19, 2019 8:16 am

ResearchMed wrote:
Fri Oct 18, 2019 8:22 pm
How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
This is what I was thinking too. How is it the seller's responsibility to represent what the buyer intends to do? What legal liability does that impose on the seller, should the buyer not follow through? Is it part of the agreement of sale that you must sign it?
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by junior » Sat Oct 19, 2019 8:43 am

fredflinstone wrote:
Fri Oct 18, 2019 6:35 pm
I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?
Do you have a copy of the addendum? If not ask for a copy in advance so you can see what they want you to sign.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ChrisC » Sat Oct 19, 2019 8:52 am

student wrote:
Sat Oct 19, 2019 7:54 am
I don't understand the negative attitude towards the seller. It was not something that he/she was familiar with and while a 1031 exchange is not uncommon, it is not exactly common either. I have heard of it but I do not know the details. Why is it not prudent for the seller to talk to his/her attorney? He/she can only be sure that his/her attorney (not the realtors) is there to protect his/her interests. Your situation may be different from the OP's. In the OP's case, they have a contract first, then the buyer presented an addendum a week before closing.
If there's negativity (and just saying someone is ignorant about a real estate transaction does not strike me as negativity) it's because the "addendum" is just another piece of paperwork in the closing documents that doesn't commit the seller to anything but just acknowlegdges that the transaction has a 1031 intermediary in the process. The seller makes no representation, no warranty, and does not do anything but sign another piece of paper documenting the presence of an intermediary purchasing the property for the buyer, as I recall.

All other terms of the contract and real estate closing, as to the seller, remain the same as if the 1031 intermediary were absent. This is analagous to me as if the buyer's funding for a loan went south with one lender and he had to obtain another loan from another lender one week before closing. Or if the buyer the one week before closing says he or she wants to add a child to the deed conveyed at the closing. Sure one should investigate the situation, but hiring a lawyer to me, makes no sense when you can really educate yourself about the process with a competent realtor.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by MathIsMyWayr » Sat Oct 19, 2019 9:25 am

ChrisC wrote:
Sat Oct 19, 2019 8:52 am
student wrote:
Sat Oct 19, 2019 7:54 am
I don't understand the negative attitude towards the seller. It was not something that he/she was familiar with and while a 1031 exchange is not uncommon, it is not exactly common either. I have heard of it but I do not know the details. Why is it not prudent for the seller to talk to his/her attorney? He/she can only be sure that his/her attorney (not the realtors) is there to protect his/her interests. Your situation may be different from the OP's. In the OP's case, they have a contract first, then the buyer presented an addendum a week before closing.
If there's negativity (and just saying someone is ignorant about a real estate transaction does not strike me as negativity) it's because the "addendum" is just another piece of paperwork in the closing documents that doesn't commit the seller to anything but just acknowlegdges that the transaction has a 1031 intermediary in the process. The seller makes no representation, no warranty, and does not do anything but sign another piece of paper documenting the presence of an intermediary purchasing the property for the buyer, as I recall.

All other terms of the contract and real estate closing, as to the seller, remain the same as if the 1031 intermediary were absent. This is analagous to me as if the buyer's funding for a loan went south with one lender and he had to obtain another loan from another lender one week before closing. Or if the buyer the one week before closing says he or she wants to add a child to the deed conveyed at the closing. Sure one should investigate the situation, but hiring a lawyer to me, makes no sense when you can really educate yourself about the process with a competent realtor.
If you sign a document after reading an unfamiliar document for the first time, you are taking a risk.
"The seller makes no representation, no warranty, and does not do anything but sign another piece of paper documenting the presence of an intermediary purchasing the property for the buyer." - What does this statement mean in the court of law and what does it not mean? Is there anything of substance missing? A house is a Big ticket item for an average person to take a chance.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by RubyTuesday » Sat Oct 19, 2019 9:29 am

They didn’t mention it earlier in the process because they didn’t want you using it as leverage.

You should sign it, but I would try to get consideration, something real but not exorbitant, perhaps $1000, in exchange. Had they been transparent earlier, or your RE agent had been competent and proactive, you would not have the confusion and stress one week before closing.

RT

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Silk McCue » Sat Oct 19, 2019 9:34 am

RubyTuesday wrote:
Sat Oct 19, 2019 9:29 am
They didn’t mention it earlier in the process because they didn’t want you using it as leverage.

You should sign it, but I would try to get consideration, something real but not exorbitant, perhaps $1000, in exchange. Had they been transparent earlier, or your RE agent had been competent and proactive, you would not have the confusion and stress one week before closing.

RT
Good grief! You want the OP to try to strong arm $1000 from the buyer for asking them to sign a document that is none of their business?

Cheers

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Sandtrap » Sat Oct 19, 2019 9:35 am

fredflinstone wrote:
Fri Oct 18, 2019 6:35 pm
I'm selling a home. It's under contract and we are supposed to close in about a week. Today the buyer said he wants me to sign an "Exchange Addendum" which states that he intends to purchase the home as structured under Section 1031 of the Internal Revenue Code. Even after some googling, I don't really understand this. Is it something I should worry about?
Nothing to worry about.
IRS liabilities and accountability lies with the buyer.
This is a routine matter for 1031 exchanges.
Consult legal counsel (take a copy of the addendum), or just ask your realtor to explain how it works.
Also, it matters not what type of property from a prior investment sale the buyer is involved in, or what business or other matter the buyer is vested in. That has nothing to do with the sale of your property. This is strictly for the buyer and the IRS.
j :happy

*"Abe" following post, explains it well.
Last edited by Sandtrap on Sat Oct 19, 2019 9:40 am, edited 2 times in total.
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Abe » Sat Oct 19, 2019 9:38 am

fredflinstone: A 1031 exchange is a way for investors to sell a property and buy another property (in this case, your house) and they can carry over their basis in the property they are selling to the property they are buying. It is perfectly legal and investors use this all the time. As long as everything is done according to the IRS guidelines, it is considered an exchange by the IRS, and that is why the IRS allows them to carry over the basis. It is also called a Starker exchange because a man named Starker was the first one to do it.
Slow and steady wins the race.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by TomatoTomahto » Sat Oct 19, 2019 9:39 am

RubyTuesday wrote:
Sat Oct 19, 2019 9:29 am
They didn’t mention it earlier in the process because they didn’t want you using it as leverage.

You should sign it, but I would try to get consideration, something real but not exorbitant, perhaps $1000, in exchange. Had they been transparent earlier, or your RE agent had been competent and proactive, you would not have the confusion and stress one week before closing.

RT
Really? Consideration for signing one more form at closing that does not put seller at any disadvantage? If receiving consideration, it should be $1, as a formality.

Closings are stressful, escrow is stressful, mortgages are stressful, home inspections are stressful, etc. This form should not materially add to the stress.

ETA: OP, BHs sometimes get carried away (potential fraudsters under every bed). Listen to the attorneys and others who advised that it’s not your dog, not your fight. Sign the form after reading it. Too late, but next time use another realtor, or get your current realtor to do his/her job and provide useful advice and counsel.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by RubyTuesday » Sat Oct 19, 2019 9:53 am

My point is that the 1031 addendum request was withheld until after terms were agreed so that seller wouldn’t have the leverage of knowing that the buyer has a tight timeline, and likely large cap gains deferred. Nothing illegal or even unethical, but none the less information on the buyer’s motivations was withheld to the buyer’s benefit and seller’s detriment.

I’m not an expert in 1031, but believe the assignment of the contract to the QI has to be done with all parties’ knowledge AND agreement (maybe the latter depends on state law).

There is a definite value to the buyer to have this addendum signed, and there was loss of negotiating leverage in not disclosing this. I would be a little upset with buyer for lack of transparency and very upset with RE agent for lack of knowledge and foresight.

I think the $1k in consideration is no less appropriate than withholding the request until after purchase agreement signed.

RT

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by Silk McCue » Sat Oct 19, 2019 10:01 am

RubyTuesday wrote:
Sat Oct 19, 2019 9:53 am
My point is that the 1031 addendum request was withheld until after terms were agreed so that seller wouldn’t have the leverage of knowing that the buyer has a tight timeline, and likely large cap gains deferred. Nothing illegal or even unethical, but none the less information on the buyer’s motivations was withheld to the buyer’s benefit and seller’s detriment.

I’m not an expert in 1031, but believe the assignment of the contract to the QI has to be done with all parties’ knowledge AND agreement (maybe the latter depends on state law).

There is a definite value to the buyer to have this addendum signed, and there was loss of negotiating leverage in not disclosing this. I would be a little upset with buyer for lack of transparency and very upset with RE agent for lack of knowledge and foresight.

I think the $1k in consideration is no less appropriate than withholding the request until after purchase agreement signed.

RT
I would never do business with someone that acted like you propose.

Buyers have zero obligation to share their motivations. No one ever gushes, I just love this place and always dreamed of owning in this neighborhood, or we really need to make this purchase quickly because our house is closing in two weeks and we need to move out, or we really need to get our kids into a house in this school district.

Just like sellers don't need to expose that they have a need to sell quickly for any reason. What if the buyer used the same logic you propose because the seller hid from them how desperately they need to sell the house and tried to jack them up for $1000 reduction after a contract was signed.

Unethical.

Cheers

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by RubyTuesday » Sat Oct 19, 2019 10:28 am

Agree that buyers and sellers have no obligation to share motivations. There is also no obligation on the seller to sign the 1031 addendum.

Why didn’t buyer disclose this? Do you think it could have been because they didn’t want seller to know about it before price was set?

Real estate deals are made between a SPECIFIC buyer and seller. A motivated seller will accept less to make a deal. A motivated buyer will pay more. Buyer didn’t want seller to know just how motivated they were. There’s absolutely nothing unethical about taking into account a specific buyer’s or seller’s motivations when making a deal.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ResearchMed » Sat Oct 19, 2019 10:49 am

Longdog wrote:
Sat Oct 19, 2019 8:16 am
ResearchMed wrote:
Fri Oct 18, 2019 8:22 pm
How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
This is what I was thinking too. How is it the seller's responsibility to represent what the buyer intends to do? What legal liability does that impose on the seller, should the buyer not follow through? Is it part of the agreement of sale that you must sign it?
Could someone please explain why the P&S and then (or perhaps *only*) the final sales documentation (primarily price paid and also date of sale, given time deadlines for 1031's, etc.) is not sufficient, and why the seller needs to be involved at all in somehow documenting something about the buyer's business issues?

Thanks.

RM
This signature is a placebo. You are in the control group.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by RubyTuesday » Sat Oct 19, 2019 11:07 am

ResearchMed wrote:
Sat Oct 19, 2019 10:49 am
Longdog wrote:
Sat Oct 19, 2019 8:16 am
ResearchMed wrote:
Fri Oct 18, 2019 8:22 pm
How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
This is what I was thinking too. How is it the seller's responsibility to represent what the buyer intends to do? What legal liability does that impose on the seller, should the buyer not follow through? Is it part of the agreement of sale that you must sign it?
Could someone please explain why the P&S and then (or perhaps *only*) the final sales documentation (primarily price paid and also date of sale, given time deadlines for 1031's, etc.) is not sufficient, and why the seller needs to be involved at all in somehow documenting something about the buyer's business issues?

Thanks.

RM
The contract will be assigned to the qualified intermediary. Requires sellers knowledge and possibly consent.

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ResearchMed
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ResearchMed » Sat Oct 19, 2019 11:20 am

RubyTuesday wrote:
Sat Oct 19, 2019 11:07 am
ResearchMed wrote:
Sat Oct 19, 2019 10:49 am
Longdog wrote:
Sat Oct 19, 2019 8:16 am
ResearchMed wrote:
Fri Oct 18, 2019 8:22 pm
How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
This is what I was thinking too. How is it the seller's responsibility to represent what the buyer intends to do? What legal liability does that impose on the seller, should the buyer not follow through? Is it part of the agreement of sale that you must sign it?
Could someone please explain why the P&S and then (or perhaps *only*) the final sales documentation (primarily price paid and also date of sale, given time deadlines for 1031's, etc.) is not sufficient, and why the seller needs to be involved at all in somehow documenting something about the buyer's business issues?

Thanks.

RM
The contract will be assigned to the qualified intermediary. Requires sellers knowledge and possibly consent.
I still don't seem to get this... *why* is the seller required to know the buyer's purposes? (Or "give consent"?)

Why isn't in "on the buyer" (and perhaps any buyer's agents?) to be sure buyer is exchanging appropriately?

Is it only the sale price (and date) that matter?
If things like use of property (e.g., rental, single family vs. multi, or commercial, etc.) are important, how can the seller speak to that other than based upon buyer's representation - in which case, what is the seller's signature adding (other than perhaps "that's what the buyer told me")?
What can the seller add that is not in the sales docs?

RM
This signature is a placebo. You are in the control group.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ChrisC » Sat Oct 19, 2019 11:25 am

ResearchMed wrote:
Sat Oct 19, 2019 10:49 am
Longdog wrote:
Sat Oct 19, 2019 8:16 am
ResearchMed wrote:
Fri Oct 18, 2019 8:22 pm
How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
This is what I was thinking too. How is it the seller's responsibility to represent what the buyer intends to do? What legal liability does that impose on the seller, should the buyer not follow through? Is it part of the agreement of sale that you must sign it?
Could someone please explain why the P&S and then (or perhaps *only*) the final sales documentation (primarily price paid and also date of sale, given time deadlines for 1031's, etc.) is not sufficient, and why the seller needs to be involved at all in somehow documenting something about the buyer's business issues?

Thanks.

RM
You misunderstand the process. There is no documentation of the buyer’s business issues. This is an IRS requirement imposed on the buyer; I guess if the seller is really nervous he can cancel the sale and closing, and I bet the buyer would have a great lawsuit against the seller.

The seller is signing a piece of paper saying that he is selling to a 1031 intermediary who is acting on behalf of the buyer. Would it make a difference to you if the buyer a week before closing says that he established a revocable living trust in his name and all the closing papers should be in the name of the trust.

There’s no material change to the sale; just one added piece of paper.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by RubyTuesday » Sat Oct 19, 2019 11:27 am

ResearchMed wrote:
Sat Oct 19, 2019 11:20 am
RubyTuesday wrote:
Sat Oct 19, 2019 11:07 am
ResearchMed wrote:
Sat Oct 19, 2019 10:49 am
Longdog wrote:
Sat Oct 19, 2019 8:16 am
ResearchMed wrote:
Fri Oct 18, 2019 8:22 pm
How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
This is what I was thinking too. How is it the seller's responsibility to represent what the buyer intends to do? What legal liability does that impose on the seller, should the buyer not follow through? Is it part of the agreement of sale that you must sign it?
Could someone please explain why the P&S and then (or perhaps *only*) the final sales documentation (primarily price paid and also date of sale, given time deadlines for 1031's, etc.) is not sufficient, and why the seller needs to be involved at all in somehow documenting something about the buyer's business issues?

Thanks.

RM
The contract will be assigned to the qualified intermediary. Requires sellers knowledge and possibly consent.
I still don't seem to get this... *why* is the seller required to know the buyer's purposes? (Or "give consent"?)

Why isn't in "on the buyer" (and perhaps any buyer's agents?) to be sure buyer is exchanging appropriately?

Is it only the sale price (and date) that matter?
If things like use of property (e.g., rental, single family vs. multi, or commercial, etc.) are important, how can the seller speak to that other than based upon buyer's representation - in which case, what is the seller's signature adding (other than perhaps "that's what the buyer told me")?
What can the seller add that is not in the sales docs?

RM
Ask the IRS!
As part of the IRS regulations, the parties to the contract must be notified there has been an assignment. Therefore, the required 1031 notification of the assignment will need to be dealt with before settlement.
From https://www.1031.us/1031-exchange-adde ... -need-one/

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ResearchMed » Sat Oct 19, 2019 11:32 am

ChrisC wrote:
Sat Oct 19, 2019 11:25 am
ResearchMed wrote:
Sat Oct 19, 2019 10:49 am
Longdog wrote:
Sat Oct 19, 2019 8:16 am
ResearchMed wrote:
Fri Oct 18, 2019 8:22 pm
How are you supposed to know why the buyer is buying, or what other transactions he/she has or will have?

I thought the specifics of the property itself (price, income, whatever) were what was need, so the buyer is documenting the similarity/etc., of the properties (the one the buyer is selling as well as what the buyer is buying).

Why does the seller need to get involved in the buyer's motives/business practices?

Also, why is the buyer springing it on seller at the last moment?
I'd be both suspicious and also ticked off, in case it's something that could (even remotely) derail the sale...

RM
This is what I was thinking too. How is it the seller's responsibility to represent what the buyer intends to do? What legal liability does that impose on the seller, should the buyer not follow through? Is it part of the agreement of sale that you must sign it?
Could someone please explain why the P&S and then (or perhaps *only*) the final sales documentation (primarily price paid and also date of sale, given time deadlines for 1031's, etc.) is not sufficient, and why the seller needs to be involved at all in somehow documenting something about the buyer's business issues?

Thanks.

RM
You misunderstand the process. There is no documentation of the buyer’s business issues. This is an IRS requirement imposed on the buyer; I guess if the seller is really nervous he can cancel the sale and closing, and I bet the buyer would have a great lawsuit against the seller.

The seller is signing a piece of paper saying that he is selling to a 1031 intermediary who is acting on behalf of the buyer. Would it make a difference to you if the buyer a week before closing says that he established a revocable living trust in his name and all the closing papers should be in the name of the trust.

There’s no material change to the sale; just one added piece of paper.
So the seller is supposed to be absolutely sure about the intermediary, etc., also?
I can't imagine being totally new to 1031's/etc., and being expected - required! - to sign such a document, especially on very short notice, or risk being sued if buyer misses deadline!

RM
This signature is a placebo. You are in the control group.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by fredflinstone » Sat Oct 19, 2019 11:53 am

Just want to thank everyone for their input. It really was very helpful.

Now that I better understand this situation, I get why the seller waited to the last minute to spring this on me. It's no big deal. If I were in their shoes, I would have done the same thing. I am a strongly motivated seller, and as long as this form isn't going to cause any headaches down the road (as the vast majority of you are suggesting), I am inclined to sign it.

In defense of my Realtor, this is a deeply-discounted do-it-yourself arrangement -- something I knew going in. I paid her to put the home on MLS but I have had to do pretty much everything else myself (even buying my own lockbox for the keys and putting up my own "for sale" sign). She is charging me a flat fee of $900. It would have cost more than 10 times that much had I used a regular Realtor. I'm really happy with her and would use her again in a heartbeat. In short, she is a barebones low-fee Realtor who does enough to meet my needs -- the kind of Realtor only a Boglehead could love.

Also, she said she would look into this thing over the weekend; it's possible that she will have an adequate understanding by Monday. I didn't want to wait, however, because I knew that asking you all would be faster and (let's be honest) more reliable.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by RubyTuesday » Sat Oct 19, 2019 11:54 am

ResearchMed wrote:
Sat Oct 19, 2019 11:32 am

So the seller is supposed to be absolutely sure about the intermediary, etc., also?
I can't imagine being totally new to 1031's/etc., and being expected - required! - to sign such a document, especially on very short notice, or risk being sued if buyer misses deadline!

RM
Seller isn’t required to sign. If he doesn’t, buyer may try to back out, but buyer could be sued in that event. But given likely time constraints, buyer would be facing financial impacts that would prompt him to either offer consideration for signing or just forego the addendum assuming agreement to the assignment isn’t required. The IRS requires seller knows about the assignment (he clearly does now). If the state doesn’t require agreement to assign the contract, buyer could likely go forward without addendum.

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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ChrisC » Sat Oct 19, 2019 12:13 pm

RM and Ruby Tuesday, you both misunderstand. At this juncture, it’s pointless trying to correct your misunderstandings. Have a good day.
Last edited by ChrisC on Sat Oct 19, 2019 12:15 pm, edited 1 time in total.

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ResearchMed
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Re: Homebuyer wants me to do a 1031 exchange. Um, what?

Post by ResearchMed » Sat Oct 19, 2019 12:15 pm

ChrisC wrote:
Sat Oct 19, 2019 12:13 pm
RM, you misunderstand. At this juncture, it’s pointless trying to correct your misunderstanding. Have a good day.
Thank you very much!

RM
This signature is a placebo. You are in the control group.

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