Yesterday we looked at how to identify replacement 1031 properties as a continuance of my recent conversations with Michael on Rain City Guide from Team Reba. Today we look at identification difficulties. It’s only proper that our discussion of potential spooks and spills in 1031 exchanges comes on 10/31, the scariest day of the year! Hopefully you won’t be scared of helping clients and yourself identify replacement properties after this.
Over time our firm has observed three primary challenges to identifying properties within the allotted 45-day time period:
- Finding something of value in a changing market
- Obtaining the desired property before others do
- Finding property that would “pencil out” into a profit
To fix potential identification problems these four actions can help an exchanger
- Plan and Prepare by looking down the road to the property types you are interested in and their location. Once that is determined with your Realtor, you can start working with a Qualified Intermediary to plot out the steps necessary to see fruition of your goals.
- Seek to use all of the time available. You should always seek to maximize the time available to search for property. From a practical matter it isn’t too hard to double or quadruple the time and have three to six months available. No one can really change the 45-day identification period, but it can be extended by searching for replacement properties before you sell and even before you list the relinquished property. Talk to me and we can get some specifics hammered out for your situation.
- Tie up at least one of the properties identified by the 45th day in order to assure that you can get at least some bang for your buck. This would include signing a Purchase and Sale Agreement and putting down some earnest money.
Consider a Reverse Exchange
if necessary. What is a reverse exchange? It is an exchange where the new purchase is closed before the sale of the old property. It is useful in today’s real estate market because sellers are not willing to accept contingent offers and exchangers need more time to find suitable replacement property. We are doing 10 times the number of reverse exchanges today that we were doing a few short years ago.
Why does it buy time? The IRS clock doesn’t start ticking until you buy replacement property, therefore you can spend all the time you want looking for it. Then the relinquished property can be put up for sale and you have 180 days to find a buyer and close on the sale.
Hopefully these tips can help you and your clients not fall prey to the ghostly pitfalls of the spooky 1031 Identification rules on this 10/31. Now go out and have fun trick or treating with your kids and be safe! A great 10/31 to you from The 1031 Like-Kind Exchange Blog!