Does my 1031 matter to the buyer?

[Gerich Fellermann]

Hello all,

We're selling a small single family rental in NJ and are hoping to use the 1031 exchange parameters to roll the gains into another property closer to us.

2 questions:

1)do we have to state our intent to do a 1031 when we accept the offer in our initial sales contract?  Or is it enough to work out the QI and details before closing?

2) Our buyer is using an FHA loan & the realtor said something about potentially not being able to do a 1031 on our end because the buyer has an FHA loan. I have not heard/read anything about this and neither has my accountant who is usually on top of things. Is there anything to this?

Thank you for the insight - we have not used the 1031 before so feeling it out for the first time on this deal.

Best,

Gerich

[Brian Sparr]

Hi @Gerich Fellermann

1. I don't believe you are required to state your intent; however, I'd highly recommend you do so.  I'm a member of two different MLSes in different states - one gives me the ability to explicitly indicate an exchange and the other doesn't.  Regardless, I always recommend you find a way to state it upfront for two main reasons: 1) you're going to be assigning your rights to the QI and the buyer is going to purchase the property from the QI (not you), and 2) you want the buyer to clearly understand that they won't incur any additional expenses because of this process.  Buying and selling property can be stressful and, at times, confusing - here's your chance to remove a little bit of that potential stress from the buyer's life by giving them a heads-up before you're even in contract.
2. My hunch is that the realtor has confused which party to the exchange is using the FHA loan. FHA loans are for owner-occupied, primary residences only. You could not use an FHA loan when you go to purchase your replacement property - there would be a clear conflict ... the 1031 indicates you're buying an investment property but the FHA loan indicates you're buying your primary residence - only one can be right. That aside, assuming the property you are selling qualifies for FHA financing, I'm not aware of any issue that would prevent your buyer from using that type of loan.