I read the htm. It seems this clause is used for their deals as exchangors. Do they charge a commission for their services? In other words are they acting a brokers or go betweens? This would explain the reason for a “delay” while they find another party to exchange with. I was referring to transactions where only the principals are involved. In that situation there is no “delay” and hence no possible liability involved. Therefore the buyer does not need to sign anything relating to the sellers tax plan of exchanging rather than not.
I may be selling a rental property to a developer. I’ll be giving him a price I want for that property that would allow me to make enough off the sale to pay my capital gains, the mortgage, then have enough left over to invest to replace the $1500/month positive cash flow I’ll lose from that property. The reason for this is because I don’t want to buy another property (kind of getting out of the business as it were)
If for some reason I change my mind and want to buy another property to avoid the capital gains, does the developer need to know about that intention? Does the buyer/developer need to be involved in the/a 1031 exchange?
Re: Does buyer need to know about 1031? - Posted by t jent
Posted by t jent on February 27, 2000 at 20:02:30:
I’m not a 1031 expert, but I’ve done a couple of trade ups this way. My understanding is that the buyer does, at some point prior to closing, need to know of your intention to exchange. The reason for this is that by way of a legal fiction the buyer is made part of the exchange. I won’t go into the details of that, but it requires the buyer of your property to sign something acknowledging the exchange and agreeing to cooperate with the exchange. Buyers have no problem with this because it imposes no expense, obligation or liability on the them. It’s a pure technicality. However, if this step is not done, you cannot decide at some point afetr that sale that you want to do an exchange after all. Your time line begins to run as soon as your sale closes escrow. And as soon as it closes, all tax-deferable proceeds must go straight to the accomodator. You can, as far as I know, wait until any time before that first escrow closes to bring the buyer in on your 1031.
If you are going to do a 1031 exchange your closing agent/attorney needs to know and you have follow the rules exactly from the beginning. What I would do is find out the requirements and set up the closing as a 1031 exchange. Then if you can’t find a suitable property within the specified time you change it back to a regular sale and collect your proceeds from your 1031 trustee. The buyer has no interest in this and doesn’t need to know anything actually. There is also a web site concerning 1031’s. I will post it next.
I don’t believe you are correct in the situation where a seller wants to effect a tax deferred exchange and name a property to buy in the future. The buyer of the seller’s property as you said has no involvement in the seller’s tax planning and is not required to sign anything related to the seller’s intentions of exchanging. Your reasoning would suggest that the seller could not do the exchange without the buyer’s blessing and cooperation and that is not true. The exception would be where the buyer of the seller’s property was indeed part of the exchange. In most situations that is not the case.
When I did my 1031, the facilitator suggested a clause in the selling contract(of the property I disposed of) which stated that the buyer realizes that I am doing a 1031 exchange and will hold me harmless from any delays associated with the exchange.
Call apiexchange or your facilitator of choice to make sure though…
P.S. you can look on their website in the FAQ section to find the clause you need to add.
I don’t think we are talking about the same kinds of exchange strategies here. Because in my strategy, and what I have done, you can sell a property to anyone and designate and purchase another like kind property from anyone within a certain time period and defer capital gains tax on the first transaction. The buyer of my property and the seller of the new property don’t know each other and there is no delay of any kind with the buyer of the first property. I don’t have to find another property before selling the first one.
We are talking about the same type of exchange I think. Mine was your standard starker exchange. The buyer of my property and the seller of the property I bought did not know each other(in fact they were in different states!) I think the clause is mainly a CYA in case there is some delay with the exchange co sending docs etc. I am not sure if the IRS requires the clause in the contracts or not, but it certainly cannot hurt to have it in there.