Purchasing Replacement Property from a Builder

asset preservation inc

When a taxpayer considers purchasing new construction from a builder as replacement property in a 1031 exchange, they should be aware of various factors in advance of the 1031 exchange transaction.

RECEIPT OF PROPERTY TO BE PRODUCED

  1. The delayed exchange rules allow taxpayers up to 180 calendar days to purchase replacement property. This time frame is statutory and only property properly identified within 45 calendar days and acquired within 180 days qualifies as like-kind replacement property in a 1031 exchange. Taxpayers should be aware there are no provisions providing for construction delays or other factors where a builder may not be able to deliver replacement property to a taxpayer within the 180-day time deadline. A reasonable approach might be for the taxpayer to negotiate for the builder to close on the sale of the replacement property a little in advance of the actual 180th day to provide margin for any potential last-minute issues that could potentially push back the actual closing date.
  2. If a builder has a lender funding their construction project, often the lender will not allow the builder to transfer a property to the 1031 exchange buyer until they have a “Certificate of Occupancy.” Taxpayers should discuss these and other issues with the builder prior to entering into a contract to make sure there will not be challenges on the builder’s side of the transaction that might negatively impact the ability of the builder to transfer the newly constructed replacement property to the taxpayer within the 180-day exchange period time deadline.
  3. To qualify for 1031 tax deferral, the taxpayer must receive like-kind real property, not services to be produced any time after the expiration of the exchange period. Any exchange proceeds that are not reflected in actual improvements to real property within the 180-day exchange period are considered boot since production services to be built in the future are not like-kind real property. The Treasury Regulations specifically states the following: “…is not within the provisions of Section 1031(a) if the relinquished property is transferred in exchange for services (including production services). Thus, any additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of like-kind.”

IDENTIFICATION OF PROPERTY TO BE PRODUCED

  1. The Treasury Regulations also state: “Replacement property is identified only if it is unambiguously described in the written document or agreement. Real property generally is unambiguously described if it is described by a legal description, street address, or distinguishable name.” Accordingly, the taxpayer should make sure that they unambiguously describe replacement property which will normally be something like an actual street address or the specific address and property unit number. If the replacement property consists of property to be produced, in addition to meeting the foregoing requirements, the taxpayer must identify the real property and the improvements to be constructed in as much detail as is practicable at the time the identification is made.

Contributed by Asset Preservation Inc., Roseville, CA 866-515-8124

As-Is. What Does It Really Mean?

NV Assoc of Realtors

Tiffany Banks, General Counsel

Reprinted for Real Estate Lake Tahoe Stiles

What does it mean when a property is being sold as is?  Does that mean that the buyer takes the property as it is with all defects it may have?  What does that mean for the seller?  Does the seller say once the property is transferred, they are free of any risks and liabilities because I sold it this way?  We are seeing more properties being sold this way and wanted to break down these issues so you as a REALTOR® can understand what this means for your client.

How does a court interpret an as is clause?

The courts often interpret an “as is” clause in a contract to imply that a property could be defective.  This means that the seller wishes to sell the property in existing physical condition it is in and the buyer is agreeing to accept that condition when making an offer.

Is a seller still required to disclose known defects?

Yes.  Just because a property is being sold as is, a seller must still make disclosures they normally would on defects with the property that they know about it. Every sale of a residence MUST include the Seller’s Real Property Disclosure form (SRPD) in accordance with NRS 113.130. There are very few exceptions, and the inclusion of an “as is” clause is NOT an exception. A seller may not insert an as is clause into a contract and assume that they are safe from claims for property defects.  We always say, “disclose, disclose, disclose” and there is a perfect buyer for every property.  A broker should warn sellers that selling “as is” is not a shield from claims of misrepresentation, fraud or nondisclosure. 

Does a buyer still have a right to inspect the property?

Absolutely.  Just because a property us being sold as is, doesn’t mean that a buyer can’t (or shouldn’t) inspect the property.  If a buyer needs even more of a reason, this would be it.  When representing a buyer in an as is transaction be sure that they take adequate time to do due diligence and necessary inspections, so they have an idea of the actual property condition.  Unless the contract specifically says otherwise, the buyer is entitled to cancel the contract based on items discovered during the inspections.

So, what DOES “as is” mean? 

The simplest way to explain this is that by selling the property as is, the seller is saying that they won’t make any repairs.  It is that simple.  They still have to disclose all known material facts and defects relating to the property. 

Can a buyer still ask for repairs to be made that they discover during due diligence?

They can, however the seller is asserting that they want a buyer to take the property as it is and not have to make any repairs.  We would recommend advising the buyer to seek appropriate counsel regarding the risks of buying a property in “as is” condition. 

Statements made by the Nevada REALTORS® Legal Information Line attorneys on the telephone, in e-mails, or in legal e-news articles are for informational purposes only. Nevada REALTORS® staff attorneys provide general legal information, not legal representation or advice regarding your real estate related questions. No attorney-client relationship is created by your use of the Legal Information Line. You should not act upon information you receive without seeking independent legal counsel. Information given over the Legal Information Line or in these articles is for your benefit only. Do not practice law or give legal advice to your clients! Inform your clients they must seek their own legal advice.

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