45 days might seem like an eternity to identify your investment property for the replacement arm of your 1031 Exchange, but when the clock starts ticking, time moves at warp speed.

A 1031 exchange requires the replacement property(s) be identified no more than 45 calendar days following the date of sale on the relinquished property. That’s calendar days, not business days, weekends included! There are specific rules related to how the new properties are identified, who is involved, and minimum and maximum values.

Understanding the process and the requirements is critical because mistakes can nullify the exchange, resulting in a potentially egregious tax burden.

Identifying the Replacement Property

In a 1031 exchange, the proceeds from one investment property must be reinvested in a like-kind replacement, which would allow the investor to defer their capital gains taxes. Most real estate will qualify as like-kind, but personal property, stocks, and partnership interests do not. The selected property, or properties, must be specifically identified using the property’s street address, distinguishable name, and/or legal description.

The new property (replacement) must be of equal or greater value as the relinquished property, which means it’s important to call out unit numbers as appropriate. Otherwise, it could indicate either the entire property is being acquired or the replacement might fall short of the fair market value requirement. If the replacement property will be in the form of beneficial interests in a Delaware Statutory Trust or co-owned property, the exact percentage of ownership must be disclosed. If there is any ambiguity, the 1031 exchange could be disallowed.

The replacement property does not need to be under contract during the 45-day window, but the entire transaction must close within 180 days from the sale of the relinquished property. These deadlines are generally not flexible or circumstantial.

Investors also can change their minds during the 45-day period by revoking one property and identifying another, but this must be done by notifying your Qualified Intermediary formally in writing.

The Role of the Qualified Intermediary

A Qualified Intermediary (QI) is required to facilitate all 1031 exchanges. The QI ensures the investor does not take possession of cash or property before completing the exchange. The investor must notify the QI in writing of the properties identified during their 45-day window.  

The IRS has clear guidelines on who can and cannot act as a QI and warns investors to conduct due diligence before selecting a QI as there have been cases of QIs being unable to meet their contractual obligations or failing to follow all requirements. The 45-day period cannot be extended under any personal circumstances.

“You cannot act as your own facilitator,” the IRS specifies in FS-2008-18. “In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) cannot act as your facilitator.”

If you or your client are in need of a QI, one can be referred to ensure proper 1031 exchange protocol.

Numbers to know: 3, 200%, 95%

When identifying replacement properties there are three numbers to know related to the number of properties that can be identified and the value of those properties. Here is a quick summation:

3: It’s possible to identify up to three replacement properties in a 1031 exchange. Real estate deals sometimes fall through so identifying more than one option can serve as a contingency plan. It’s also possible to close on more than one property. It’s one, two, or three that can be closed on in this circumstance.

200%: If you are looking to acquire multiple properties, it is possible to identify more than three properties as long as their combined value does not exceed 200% of the sale price of the relinquished property. This rule allows for additional room to identify extra properties as “back-up” options, to use as safety nets for a failed deal.

95%: The exception to the 200% rule is that it’s possible to identify unlimited properties as long as at least 95% of the value of those properties are acquired. The caveat is if the investor ends up not closing on minimally 95% of the value of the identified properties, the 1031 exchange will be nullified.

With a short window to identify replacement properties in a 1031 exchange, it’s important to understand the requirements and carefully choose your QI. It’s also vital to work with a knowledgeable guide to help navigate the waters of your exchange.

Please contact us if you have any questions about this topic or would like assistance with your 1031 exchange.

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This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.

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