Property Acquried Through Sheriff Sale Qualifies for 1031 Exchange

Here is a question that I received today via email.

If I buy a property which is being sold at auction by
the county for defaulting on property taxes, and assuming I meet the deadlines,
can I use this as a replacement property in a deferred 1031 exchange? If the
last owner of record was a defunct corporate entity whose charter was revoked,
who is the party with whom I am exchanging? Is it the county?

Yes, you can acquire this property and it will qualify for your 1031 exchange provided that both properties are held for rental income, investment or are used in your trade or business.

Counties normally have Sheriff Sales to dispost of properties that were taken for unpaid property tax bills. The Sheriff Sale will issue you a deed upon closing and settlement.

However, the challenge is how the 1031 exchange can be structured. The Qualified Intermediary must be assigned into the purchase and sale agreement and any escrow instructions, if any. There are often no agreements at trustee sales or county Sheriff Sales. We would need to contact the department responsible for processing the sale to determine how the transaction is actually settled in order to determine how to structure the actual 1031 exchange. But, it can be done.

Reverse Exchange Pricing

We do a lot of reverse exchange transactions each and every month. In fact, we have seen an increase in reverse exchanges this year compared to what we thought we would see given the real estate market.

How Much is Not Enough and How Much is Too Much

The question we obviously get asked often is how much should we expect to pay for a reverse exchange transaction? Reverse exchange providers are still feeling their way along the pricing models to a certain extent. We see prices that run from $1,800.00 (which should really, really scare you) to well over $25,000.00, which is absolutely rediculous (unless it is a huge transaction).

Complicated Tax Deferred Exchanges

Reverse exchanges are complicated tax-deferred exchange strategies that should not be taken lightly. We have seen many pricing models in the industry, and generally, the lower fees are nightmares waiting to happen, while the really high end fees are taking advantage of the real estate investor.

Competent Reverse Exchange Servicers

Generally, competent reverse exchange servicers are going to be charging somewhere between $5,000.00 and $8,000.00, which should include the reverse exchange services, the documentation, any consulting needed to get the job completed, and the set-up maintenance and dissolution costs and service for the separate LLC that is set-up for each individual reverse 1031 exchange transaction.

Taxpayer Loses Partial Tax Free Exclusion on Sale of Personal Residence

Property owners are in for a surprise if they have used their personal residence in the past for rental or investment purposes. The tax free allowance of $250,000 per person when a property owner sells their personal residence is reduced if the personal residence was a rental or investment property before it was their personal residence.

The changes were included in the Housing Act of 2008 and modify Section 121 of the tax code.

The amount of taxable gain applied toward the time period that the property was held for rent or investment will no longer be tax free. The amount of taxable gain applied toward the time period that the property was held as the property owner's personal residence will still qualify for the tax free deduction.

Learn more about the modifications to Section 121 under the Housing Act of 2008.