One of the most important requirements of a successful 1031 exchange is the proper identification of replacement property within 45 days of when the relinquished property is transferred to a Buyer. While this requirement seems simple to satisfy, for many, it creates a great deal of stress for a variety of reasons.
Following are the most common issues that pop up and tips on how to avoid unnecessary worry.
Maximizing your Time
There is no doubt 45 days fly by but there is no reason why you should wait until the relinquished property closes before starting to look for desirable replacement property. On average, there is at least 60 – 90 days between the date an Agreement of Sale is signed and when a property closes. Utilize that time to begin searching for replacement property. The replacement property can be acquired immediately after the relinquished property closes.
Changing your Identification
We all change our mind sometimes and there are occasions when the perfect property comes on the market after an identification is submitted. If you are still within the 45-Day Identification Period, you can change your ID but you must still keep in mind the 3-Property Rule and 200% Rule. Your identification will include BOTH letters submitted to 1031 CORP. unless you revoke the first one. A revocation must be made in writing in the same manner as the original identification. After midnight of the 45th day, no changes can be made to an identification.
Waiting Until the Last Possible Minute to Send your ID
Technology makes it very easy to fax or scan and email your 1031 replacement selections the 45th day. But dont wait to the last minute!
The disadvantage of sending something over late in the day on Day 45 is that you could lose the opportunity for your Exchange Officer to review your identification, notify you of a problem and allow you to resend a corrected ID before midnight. If you think you will send your 1031 selection over near the last minute, be sure to send a draft in advance to your QI for review.
Identifying More than Three
The rules say if you ID up to three properties, it does not matter what their combined fair market value is. However, when identifying four or more properties, the 200% rule kicks in and says all properties combined cannot be more than 200% (or twice) the value of the old property.
Excess Funds Must Be Held Full 180 Days
Many ID a back-up property just in case the one they want falls through. Keep in mind that if more than one property is identified (even with the intention of only acquiring one), after that one property is acquired, any excess funds cannot be released until the end of the 180-Day Exchange Period.
Buying with Someone Else
You can acquire a replacement property with someone else as long as you take title as tenants-in-common and not partners. It is essential that you identify exactly what you will acquire either by the percentage of ownership or the dollar amount of ownership. Don’t forget your undivided fee interest must be equal or greater in value than your relinquished property.
Substantially what was Identified
Replacement properties must be unambiguously identified and what is acquired must be substantially the same as what was identified. Also, unit numbers and exact property addresses are required.
Keeping these tips in mind will help keep the identification process a simple one for all parties involved. Your QI will provide detailed identification instructions and is always available to answer your questions.