Steven,

It looks like I'll be involved in a 1033 exchange pretty soon.  The town has offered to purchase my house to enlarge their park, and said they would process it as aFriendly Condemnation so I can process it as a 1033. 

I'd like to purchase a house for less money than I'm selling this house for, and take the extra dollars to invest in fixing up the new property.  Is that allowed?

Is there anything I should watch out for in doing this?

Thanks!

Im very familiar with 1031 exchanges and have done them frequently for myself and my clients. Can you explain the difference between a 1031 and 1033 exchange?

Hi Eric, the term "a Friendly Condemnation" is interesting.  It is my understanding that a "threat of condemnation" must be issued.  A friendly condemnation could mean, if you don't close, they may not take the property.  To help you sleep better at night I would add a simple sentence addressing what happens if you don't close.  Something like this, if for any reason the seller can not close escrow on {address} the city will proceed with the eminent domain procedure.  Hope this helps!

Steve

Hey Steve,

Just chiming in on the "friendly condemnation" comment above: Many governmental agencies will try to negotiate a deal making it a "friendly condemnation." Accepting a friendly condemnation could damage your ability to defer your capital gain taxes on this sale. I've heard some advisors tell their clients to reject friendly condemnation letters and force the government to exercise their condemnation rights to protect their ability to do a 1033 exchange.

Eric, you should definitely discuss this issue with your accountant and potentially a real estate attorney to protect your ability to do a 1033 exchange and make sure you don't inadvertently lose those rights.

Lisa