Real estate investors are purchasing properties at steep discounts by utilizing techniques such as short sales, courthouse step sales, and purchasing bank-owned properties (REO). While these approaches can often provide excellent buying opportunities, buyers who engage in 1031 tax-deferred exchanges must pay extra attention to the details of their particular acquisition, as each of these approaches can present difficulties in completing a successful 1031 exchange. The important point to realize is that each of these approaches has unique issues that must be understood and addressed early on. Some of the problems include:
- Problems meeting the 180-day exchange period deadline due to inability to control the closing of the purchase. This is a common problem, particularly with short sales. Prudent exchangers will minimize this risk by taking full advantage of the 45-day identification rules. In short, you are on the seller's time schedule, not on yours.
- These transactions often have rigid structures. As such, you may have difficulty complying with 1031-specific requirements, including contract assignability and deeding flexibility. Often, sellers in these situations are not willing to respect the need for slight modification to their "procedure" to effectuate a technically valid 1031 exchange.
- In the case of courthouse step purchases, advanced planning is necessary, as cashier's checks must accompany the winning bid at the time of the purchase. You will not know what the final winning bid figure will be, therefore it is prudent to have multiple cashier's checks in appropriate increments ready. Of course, all cashier's checks must be immediately returned to the qualified intermediary if you are not the winning bidder.