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last owner of record was a defunct corporate entity whose charter was revoked,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.