Q: Can the Seller of “replacement property” real estate, in a 1031 like – kind exchange, place conditions on the sale of that real estate which would entitle the Seller to receive the property back in certain situations?
A: A Seller may condition the sale of “replacement property” in a 1031 like – kind exchange which would require the property to revert back to the Seller in certain circumstances. However, placing such a “hook” of some sort on the replacement property that the Buyer in a 1031 like – kind exchange is planning to receive could jeopardize the Buyer’s tax deferred status and treatment of the proposed 1031. To know for sure, we would need more clarification on what this “hook” looks like and how it is to be structured. Does the Seller want a unbinding ‘intent’ to have the property revert back in the future via estate planning documents (i.e. Transfer On Death deed, Last Will & Testament, etc.); or, does the Seller want an irrevocable binding up-front obligation? These are extremely different concepts, which can have very serious tax consequences in regard to the proposed 1031 tax deferred treatment objectives. In light of the potential consequences of such, both Buyer and Seller in such a transaction would need to get a CPA and tax lawyer to advise them on this issue prior to proceeding.