Seller is asking me to participate in a 1031 tax exchange. Does this affect me?


W

woobles99

I am buying a property as a second home out of state. The
seller has asked me to participate "at no cost to me" in a
1031 exchange? Since I am not exchanging anything and am
simply buying a second home, why does he need me to sign and
"participate"? Im lost, please advise on if this can come
back to haunt me somehow...

Thanks in advance
Robert
 
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I

Io Sono Mio

I am buying a property as a second home out of state. The
seller has asked me to participate "at no cost to me" in a
1031 exchange? Since I am not exchanging anything and am
simply buying a second home, why does he need me to sign and
"participate"? Im lost, please advise on if this can come
back to haunt me somehow...
better phrasing might be something like:

SECTION 7. USE OF PROPERTY AS PART OF EXCHANGE PURSUANT TO INTERNAL REVENUE
CODE SECTION 1031.
The parties understand and agree that one or more of the
Sellers may wish to use the Property as part of a like-kind
exchange pursuant to Section 1031 of the Internal Revenue
Code or to seek some other tax benefit available pursuant to
that code. In the event one or more of the Sellers decide
to use the Property or any portion thereof as part of such
an exchange or other proceeding, Buyer agrees to reasonably
cooperate in such an exchange, and to do all acts reasonably
necessary or desirable to effectuate such an exchange, at no
cost to the cooperating party.

the only thing I can think of that you would need to do
would be to agree to sell to or buy from the other party's
exchange intermediary, rather than the other party itself.
 
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M

MTW

Since I am not exchanging anything and am
simply buying a second home, why does he need me to sign and
"participate"?
When in doubt, just say "no."

By the way, was this participation requirement CLEARLY
disclosed in the property listing? If not, you might have
grounds to compel the completion of the transaction in the
"normal" way (without any "exchange" issues).

MTW
 
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H

Hugh

If the purchase and sale agreement is not signed at this
time, you then may have some leverage since the seller has a
strict time limit to transact this deal as an 1031 exchange
and you just may reduce your offer accordingly.

If the purchase and sale agreement is already signed and the
exchange is mentioned in it as a condition of the sale, you
have no recourse but to sign.

If the purchase and sale agreement is already signed and
exchange is NOT mentioned you have the leverage of saying OK
there will be no exchange just a plain vanilla sale at the
agreed to price or demand something for your signature.

The person who wants an exchange normally does not tip his
hand before hand because the other party would then have
some leverage.

So depending upon which scenario above fits, you may have
some interesting choices to make but be rest assured you
will have no consequences if it is an exchange instead of a
normal outright sale.
 
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K

KJ Nichols, CPA

What is happening is this, the seller has decided to
"exchange" the property you are buying for a similiar
property. BY doing this the seller will not have to pay tax
on any "gain" from this sale.

In reality, this is what takes place.

The seller contracts with an IRS approved third party called
an intermediary. This person can not be related to the
seller. The seller then contracts to sell his property.

At the closing, the intermediary receives the money from the
buyer. The seller is barred from ever taking possesion of
the money.

At a later date, the seller buys the similar property and
the intermediary releases the money to the seller of the new
property.

IRS rules require the seller to disclose the fact that he is
doing a 1031 exchange in the selling contract.

All you are doing is buying a property. There are no
strings attached nor anything that you will be responsible
for concerning the 1031 exchange. It just a simple
purchase. Go ahead and buy.
 
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