1031 Exchange into a wholesale assignable contract closing?

Question

I have a wholesale deal that I would like to close with 1031 exchange funds.

In the past the QI has wanted the closing docs and I am sue this one will be the same.

Does the wholesalers fees or funds give any problem to the QI approval?

Cheers,

Buddy

Dave Foster · Answer

@Buddy Holmes, Hmmm sounds like it's going to be between you and the wholesaler.  They get a check and you have to make sure they put the HVAC in.  If they don't you won't have recourse since everything's on the settlement statement.

You could have a check cut directly to the HVAC contractor and put on the settlement statement as a purchase concession.  As long as the amount is less than 10% of the purchase price of the property and as long as it is for something that would normally be considered to be part of the house (roof, hvac, etc) then I've seen that fly.  It's a relatively untested area.

Dave Foster · Answer

@Buddy Holmes, if you want the fees to count as part of the 1031 they'll need to be on the settlement statement.  In essence they become a cost of the purchase like a commission.  And I don't think that the QI will want to wire money out of the 1031 account to pay for those outside the closing.  Once your transaction is complete the left over funds are boot anyway and you could pay a wholesaler at that point.  But they'd have to be patient.

I'd check with the title co and see if they would allow a "assignment fee" to be put on the settlement statement and paid to the wholesaler.

Dave Foster · Answer

@Buddy Holmes, whether or not an assignment fee is a standard and ordinary cost of closing will be determined ultimately by what your acct. is comfortable with.  They are a bit out of the ordinary but also act very similar in nature to a commission but paid by the purchaser in a transaction.

If your acct is comfortable with it as a normal closing cost it will still have to be placed on the settlement statement to qualify as part of the 1031.

If it is not going to be considered part of the 1031 it is always best to pay these outside of closing so as to not mingle them with 1031 funds.

In the event that is not possible your accountant can still spin these costs out of the exchange when filing your taxes next year and make them boot even if they are on the settlement statement and paid for with 1031 funds initially.

Buddy Holmes · Answer

@Dave Foster,

My Assignment closing is a Florida SFR.  And the closing company is a Title company.  I have done a NON 1031 closing with them in Aug 2017 and they listed the assignment fee on my closing settlement statement ("HUD-1").   This planned transaction is a 1031 exchange and I am being told that 1031 funds can't pay for the assignment fees and I will have to pay that out-of-pocket.

Since I don't know what the fees will be until I sign the contract I am sort of stuck.

Help please

Cheers,

Buddy

Buddy Holmes · Answer

Thanks again @Dave Foster

Buddy Holmes · Answer

Thanks @Dave Foster,

I have closed with this wholesaler and escrow company previously (not an 1031 exchange) and I think they did just place the wholesalers fee on the closing docs.  I will check to be sure.

We would like the closing escrow to hold back some funds from the agreed purchase price for a contractor to add a HVAC unit after closing as well. As a QI would this be a problem.  It would come from the Wholesaler fee and be included in the closing docs.   Would the QI be required to hold back these funds until completion or would he trust the escrow company to handle it properly?

Cheers,

Buddy

1031 Exchange into a wholesale assignable contract closing?

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