When doing a 1031 exchange, a lot of folks tend to explore different avenues of acquiring replacement properties in a manner where they could get at a “lower than market value” price and do a fast closing and they turn towards purchasing properties at a foreclosure event. Then the question ends up being, can they purchase a replacement property at a foreclosure event using their 1031 exchange proceeds?
When you sell a relinquished property and decide to do a 1031 exchange, your proceeds are held by a qualified intermediary (QI) until you identify and purchase a replacement property whether it be in Houston, TX or anywhere else throughout the Union.
Foreclosure events tend to require immediate payment and there are times where the closing is not done through a title company, the answer to the above question is that you can purchase a replacement property at a foreclosure event.
However, it is best to let the auctioneer know that you are doing a 1031 exchange and will be paying the price through your QI and the QI will be wiring or cutting the check over to the trustee or sheriff (depending on the nature of the foreclosure) given that you, as exchanger, are not permitted to access the funds while the exchange is ongoing, as per the IRS’ rules. If the organizers understand and accept this arrangement, you can proceed with bidding.
In conclusion, you can definitely purchase properties at foreclosure events or auctions using your proceeds that are held by a QI, it requires careful planning and clear communication with the relevant parties involved. Make sure that the auction organizers are aware of your funding situation and are willing to work with your QI.