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I currently have my house listed for sale. A potential buyer came by today, liked the property and, as he was leaving, asked if I would sell as part of a 1031 exchange.

I understand why he would want to do a 1031 exchange. However, I don't understand why I would care that that's what he's doing.

My house is my primary residence, I'm looking to get into another primary residence, I've been in my home for over two years - all standard stuff to me.

Will his 1031 exchange cause complexity or delays in my selling my house to him?

Essentially, why would I care that the buyer is doing a 1031 exchange when buying my house?

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  • Does the offer have a contingency? If they haven't sold their property yet then they can't execute a deal with yours until their previous sale closes (without some extra obstacles)
    – Matthew
    May 11 at 0:46

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In a 1031 exchange the money would not come from the seller but from an intermediary that's holding the proceeds of the property they sold, as such there might be mention of the 1031 exchange in the contract noting the name of the intermediary or just that an intermediary will be used. I don't know if this is required/customary in your region.

A company in my state that acts as an intermediary (First American Exchange Company) says:

In addition, the taxpayer must provide written notice of that assignment to all parties to the contract, and it is usually advisable to get the other parties to acknowledge they have received the notice. The assignment and notice are required in connection with both the sale of the relinquished property and the purchase of the replacement property.

It doesn't have impact on the selling process, but perhaps some sellers don't want to sell to landlords and agents have found its best to ask up front, rather than having offer declined when they see the 1031 language in the contract.

There is a timing component to 1031 exchanges but it is likely not the reason they mention it. They have a window of time between selling and identifying/closing on the replacement property, but it exceeds standard closing timelines.

If the buyer is running out of time to identify potential properties it would give you some extra leverage.

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  • there would not be any mention of the intermediary in the contract. The seller wouldn't care, and doesn't even need to know
    – littleadv
    May 10 at 4:25
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    @littleadv Maybe it's not necessary, maybe it varies by state, but I have seen many contracts that have a "1031 Exchange Cooperation" clause or similarly worded, there are also millions of search results on the topic that disprove your claim that there would not be any mention.
    – Hart CO
    May 10 at 14:38
  • That may be worded in a standard contract, but it doesn't really matter since it would be covered by good faith requirement anyway. I've done 1031 exchanges and bought and sold multiple properties, so I can tell you from experience that there's nothing special in 1031 transaction and I had never needed to discuss it with neither sellers nor buyers (or even my own agent - just the escrow company when selling to give the fund delivery instructions).
    – littleadv
    May 10 at 16:33
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    @littleadv There could be state-specific disclosure requirements that don't apply to your state, or maybe it's just standard practice to support the identification timeline requirements. I just know that up until your comment I assumed it was either required or customary based on my experience.
    – Hart CO
    May 10 at 16:54
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A potential buyer came by today, liked the property and, as he was leaving, asked if I would sell as part of a 1031 exchange.

I understand why he would want to do a 1031 exchange. However, I don't understand why I would care that that's what he's doing.

They are asking for a couple of reasons:

  1. they have to identify the property by a 45 day deadline. If they are running out of time, they may need you move quickly. They don't want to identify the property and then something later leads to them wanting to cancel the transaction. They might want to get the home inspection done quickly, so they can understand if there are any problems. Remember they a still only a potential buyer, they haven't made an offer yet, and you haven't made a counter offer.

  2. They want to know if there is anything in your schedule that will delay the process. Do you have to find another property? How long will that take?

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  • There can be massive tax consequences if the person misses the deadlines for the 1031 exchange. They'll be moving significantly faster than a normal home buyer, and the seller needs to be prepared for that. If delays come up, the buyer will be significantly more likely to bail out instead of working with you.
    – bta
    May 10 at 16:26
  • Closing date and indemnification clauses are always part of the contract, and usually delays in closing are due to buyers' issues, not sellers. But yes, timeline is very rigid - that's generally true when you're under contract regardless of 1031, but especially true with 1031.
    – littleadv
    May 10 at 16:57
  • I considered this as potential motivation, I discounted it because you can identify multiple potential properties which provides a good bit of safety, but I still think it's a good point. It would reduce work if they could expedite timelines with seller and settle on one property faster, or as you suggest they might just have mismanaged their time and are feeling rushed. The seller needing time to buy a new home shouldn't matter too much since they have 180 days to acquire.
    – Hart CO
    May 10 at 17:10
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Will his 1031 exchange cause complexity or delays in my selling my house to him?

Shouldn't affect you at all.

Essentially, why would I care that the buyer is doing a 1031 exchange when buying my house?

You wouldn't.

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  • This was my assumption. I was thrown when the buyer's agent asked, "Would you be open to a 1031 exchange?" All I could think was, why wouldn't I be?
    – Dave D
    May 10 at 12:57
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    @DaveD The only reason you might not be is not being keen on having landlords buying up property in the area, rather than those who want to buy a house to live in. This isn't a financial issue, but a social/moral one.
    – Lio Elbammalf
    May 10 at 15:47

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