Hello,

I have recently sold a business property that I have owned and worked at for 28 years.

We have been attempting purchase a leased professional office building and to do a 1031 exchange.

 We had a property under contract, and we were already to close and assume the leases, when we find out there is an undisclosed mortgage on the property.  The mortgage company won’t allow payoff on the loan until Nov next year. And we don’t want to assume it.

We have two other properties on or list and the 45 days have passed. Only one is still available, but is in need of a lot of repair after we have inspected it. The 3^rd has been sold and is unavailable to us.

Because of the sitituation is it possible for me to locate another property and still do an exchange if we close within the 180 days? It was totally beyond our control that the property was missrepresented to us.

Also do you think I would have recourse against the seller or his agents with the office building?

Thank you

Hi Blake,

Sorry to hear about your situation. 

No, you can only change or alter your identified properties during the 45 day identification period.  You can not change or alter your identified properties once the 45 day ID period has elapsed, and you must acquire something on your ID list. 

I would also think twice about moving forward with the 1031 exchange if the only property available needs significant repairs.  Is that something that you really want to do.  If so, then go for it.  But, acquiring something just to defer taxes is not always the best path to take.  Sometimes you just have to pay the taxes.  It all depends on what you want.  You may just want to let your 1031 exchange fail and pay the taxes.

Incidentally, a failed 1031 exchange can still defer your taxes into the next income tax year if you meet certain requirements.  You have identified three properties, so technically your 1031 exchange Qualified Intermediary is required to hold your funds until after the 180 days should you decide not to purchase anything.  However, the positive here is that if the 181st day fall in the next income tax year your capital gain is deferred into 2009.  Your depreciation recapture would be recognized in 2008.  It would all be taxable in 2008 if your 181st day falls in 2008. 

I don't know if you have any recourse against the seller or agent.  It depends on local disclosure requirements, etc.  I would contact a good real estate attorney to see if you have any recourse.  Were they going to force you to buy the property subject to existing debt?  The lender would actually allow this?  Is there a prepayment penalty?