The Importance of a Purchase Agreement Damages Clause

Purchase Agreement Damages Clause

When you identify a replacement property you may pin all of your hopes of tax deferral on that one property. But when you sign the purchase agreement with the seller you may want to look closely at the damages clause in your purchase agreement. What if you sell the relinquished property, park all of your proceeds with the intermediary, and then the seller refuses to honor their commitment to you in the purchase agreement to perform and close on the sale of your replacement property?

A Prickly Damages Clause

You may need to make sure that the purchase agreement that you’ve signed contains a prickly enough damages clause that you could sue the seller for strict performance that is to give you the benefit of your bargain to receive that unique property. All of your tax deferral is hinging upon your receipt of that property within the 180 day exchange period.

Consequential Damages

Also you may want to look at how that damages clause deals with consequential damages - damages that result as a consequence of your inability to close on the replacement property. If you have a broadly written clause that includes potential consequential damages (i.e. the tax liability that you're going to have to pay in the event that the seller defaults and you can't receive your replacement property within the time frame) you may have what we call a big stick. That is a very strong enforcement mechanism in the terms of the purchase agreement to force the seller to honor their commitment to you and to perform within the times allowed for your exchange.

  • 1031 Hotline: If you have questions about purchase agreement damages clauses, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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