1031 Nightmare! Any advice?
We recently sold our rental property and relinquished it as part of a 1031 exchange. ($97200 net proceeds) We found the perfect replacement property that was about to be foreclosed on. The offer was rejected by the 2nd mortgage, and went to foreclosure. After contacting our 1031 QI, we were told that we could get back any escrow or deposit we put down on the replacement property, so we marched down to the sheriff auction and were the successful bidders. ($91800) We then discovered that no closing was necessary so we talked to a friend of the family who worked at a title company. She set up an escrow account and was going to handle the transaction for us. My understanding of the state law was that the deed had to be recorded within 15 days, so we were pressed for time. The title company got the deed and recorded it without consulting with the 1031 QI. We had sent them the identification (copy of the Trustee Sale paperwork) and title company information. I guess she was supposed to give them a title opinion report but failed to do so until after the deed was recorded. Now they say the property does not qualify and we cannot use it for the 1031 replacement property. They have since gotten pretty nasty. The 45th day is July 6, so we have some time to work this out. Is there any way to salvage this transaction? The only thing we have come up with is Quit Claiming it to someone, and then buying it back from them. I am wondering what all costs would be incurred to do this? I know the QC would lower our Estate Tax exemption. Would there be additional closing costs (Excise tax being the big one) for the person we QC to? Any other ideas would be greatly appreciated. Is there a way to cancel the deed that was recorded and redo it?
Lea[ Edited by realestaterookie on Date 06/23/2003 ]
This is a very difficult position to be in.
The issue is this - the Qualified Intermediary (Accommodator) is required pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations to "acquire" the replacement property and then convey it to the taxpayer. This is accomplished by having the Qualified Intermediary assign into the purchase contact and the escrow instructions so that they become the purchaser and then provide the closer with instructions to direct deed the property directly from seller to buyer.
In your case, the Qualified Intermediary was not assigned in, so you essentially have a separate unrelated purchase transaction. It is possible, although difficult and expensive (and in your case due to the foreclosure sale potentially impossible) to "undo" a transaction so that it really never happened and then redo it structured as a 1031 exchange. I doubt this would be an option for you.
You have already acquired title to the property, so quit claiming it to another party and then acquiring it from them would probably be viewed by the service (IRS) as a "step" transaction and would most likely be disallowed.
Your QI was correct in that you can recover any deposit that you placed into escrow, but they probably did not anticipate the transaction closing completely with out being consulted or receiving the information from the title insurance company.
It sounds like a continuous communications problem. At this point, I would highly recommend consulting with a tax AND real estate attorney (same firm) to review the specific issues to determine if anything can be done and whether anyone has any specific liability to you.
From what you have stated, it appears that everyone has somewhat dropped the ball and failed to communicate.
Hope this helps.
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William L. Exeter -
Diversified Exchange Corporation[ Edited by wexeter on Date 06/23/2003 ]
Thanks for the information/advise. Not what I want to hear, but appreciated just the same!