1031 exchange as an FHA buyer

[Nathan Muirhead]

I am under contract to purchase a duplex via FHA financing with an agreed upon closing date of today (7/13). Friday (7/10) my lender contacted me because the seller is attempting a last minute 1031 exchange which may push the closing date back a few days (no big deal). Today we were notified that as part of the 1031 exchange the buyer transferred the deed of the property into another entity (I admittedly am not well versed in the 1031 exchange process and am not sure if this is typical). As I'm sure many reading this are aware of (it was news to me), there are regulations against selling a property via FHA prior to 90 days of ownership. Due to the last minute deed transfer, that clock has been re-started as of Friday. I'm being told there really is no way around this regulation, and the seller would like to move forward but now we would have to wait 90 days to close. Has anyone experienced a similar situation? Do I have any legal recourse?

I’m relatively new to investing (this would be my 2nd duplex) and any advice/feedback is greatly appreciated. 

[Dave Foster]

@Nathan Muirhead, The lending rules are one thing.  But from a 1031 perspective it's first of all highly likely that the seller has put their exchange in jeopardy with the last minute entity change.  That is not something the IRS looks lightly at.  The only way their 1031 would be valid is if they transferred it to a disregarded entity for the current title holder.  

Don't want to throw the QI under the bus but...an entity change at the last second is a big red flag if there's an audit.  In addition to that there's no reason why the 1031 should have delayed the closing at all (title restrictions aside).  We've put together 1031 exchanges in less than an hour on closing day.  That by itself should have not caused any delay.

So if you really wanted to push back at this point you could insist on performance and let the sellers representation know that you will not close under those terms and that they need to complete the 1031 per regs and promptly for a timely closing.  But you may be a fight.  

If the contract is not assignable then you have legal right to demand that they sell to you as originally deeded.  This will not screw up their 1031.  But you may have to get them to a better QI