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My husband and I are looking for a single family home to purchase as our primary residence. An ad for a home that looks appealing to us indicates: "Buyer to participate in 1031 exchange." I understand the basic principle that a 1031 exchange is a way for the owner of a business or investment property to sell the property and re-invest the money in a new business or investment property without having to pay capital gains taxes on the sale of the original property. However, what I don’t understand is what the risk, if any, would be to me and my husband were we to purchase someone’s investment property as our primary residence in this type of situation. Is it simply a matter that we would have to agree to be in escrow until the seller locates and purchases his "like-kind" exchange property? Or is there more to it than that?

Long story short… Two buyers in escrow for the same property in south California. First buyer cannot get a loan, should have closed 4 weeks ago. Seller goes in escrow with another buyer. This buyer is able to remove the set of contingencies and close as per agreement.
The seller sent a Notice about a week and a half ago to cancel the first buyer, however first buyer did not signed the cancellation.

Are there any penalties, consequences for the first buyer (he lost his deposit already) for not closing or removing his loan contingency or not signing the cancellation docs? Are there any rules/penalties for a buyer that cannot perform?

Any of you experience or know of a similar situation?

Thank you in advance.