Q: We sold an inherited Bay Area rental property to exchange it for a small building out of state. We bought the small apartment building while visiting family. It has an owner unit for our eventual retirement and is within walking distance to the downtown. We purchased the building with cash, expecting to reimburse our retirement savings when selling the Bay Area rental house.
We understood that we could transfer the equity from the Bay Area rental house into the apartment building and defer paying taxes under the 1031 IRS tax code. No one mentioned that owning both properties in our names simultaneously might void the 1031 IRS tax code. The realty agents only promoted the reverse 1031 IRS tax code exchange concept of buying the replacement property first.
The seller’s agent for the rental house said she would seek out a firm specializing in 1031 IRS code tax exchanges. We opened an escrow account, listed the property and on day one received an all-cash, over-list price offer with a five-day settlement sale.
We never spoke with the escrow officers regarding a 1031 IRS code tax exchange. Due to COVID-19, our escrow signoff was on our driveway with a mobile notary. We didn’t speak with the third-party 1031 exchange person until today. The 1031 IRS tax code exchange expert claims that we had to have an exchange agreement before transferring ownership of the relinquished property (rental house). Additionally, we have other voiding factors for the 1031 IRS code tax-deferred exchange. Doesn’t the realty agent who represented us have liability for providing incomplete information?
A: Real estate agents are taught not to provide legal or tax advice. Tax people need to learn all tax codes. The qualified intermediary (QI) you did not engage for these transactions specializes in only the 1031 IRS tax code. The nationwide seller’s market created an environment where reverse 1031 IRS tax exchanges were in the investor’s best interest. Meaning the timeline begins upon the purchase of the replacement property. Relinquishing a property is assured when housing stock is low and demand is high. Qualified third parties need at least two weeks to set up an exchange, including purchasing insurance, before they temporarily take title to an investor’s property. Agent liability specialists — real estate attorneys in each state — are waiting for you to book consultations.
Questions? Realtor Pat Kapowich is a Certified Real Estate Brokerage Manager and career-long consumer protection advocate. He’s based in his hometown of Sunnyvale, CA. Office: 408-245-7700, Pat@SiliconValleyBroker.com Broker# 00979413 SiliconValleyBroker.com
