Part 3 - 1031 Exchanges
When planning to do a 1031 exchange the contract must state that the buyer intends to do a 1031 exchange and the seller agrees to cooperate. Exchanges must be set up prior to closing, but it is a good rule of thumb if 1031’s are identified at time of contract.
It is also important to note that the same owner needs to take title to the replacement property. This person should also be the same as the person who is the taxpayer on the property. It needs to be the EXACT taxpayer or LLC.
Exchanges must be completed by a qualified intermediary. The intermediary holds the funds after one of the 1031 properties is sold and uses it to buy the new replacement property. When doing a 1031 exchange the owner must identify the property he is exchanging and declare it prior to the sale.
Replacement property identification MUST be completed within the first 45 calendar days by midnight. Identification is made in writing in letter form, signed by the taxpayer. It must include unambiguous descriptions of the properties and hand delivered, mailed, copied, or emailed as a PDF to the qualified intermediary. Failure to meet this deadline may compromise the 1031 exchange.
Property Identification Restrictions
Three Property Rule allows the exchanger to identify up to 3 properties. There is no limit on the combined fair market value of these properties and the exchanger can acquire 1 or more of these properties as part of the exchange. This is the most commonly used identification option.
200% Rule allows for the exchanger to identify an unlimited number of properties as long as the combined fair market value of these properties is not more than 200% or twice the fair market value of the relinquished property. This option is typically used by exchangers who want to trade a larger valued property for several smaller valued properties.
95% Exception Rule allows the exchanger to identify an unlimited number of properties exceeding the 200% rule, but the exchanger must acquire 95%+ of the fair market value of the properties identified. This is by far the riskiest exchange option. If the exchanger fails to acquire 95%+ of the fair market value of the identified properties the entire exchange fails.
You have 180 calendar days from the sale of the original property to close on the purchase of your replacement property or properties.
This is Part 3 of a 5 part series addressing 1031 exchanges. Please visit my other blogs for more information on 1031 Exchanges:
Part 1 - What is a 1031 Exchange?
Part 2 - 1031 Exchange Process
Part 4 - Types of 1031 Exchanges
Part 5 - Advantages of 1031 Exchanges
If you are considering selling an investment property I highly recommend you speak to your financial advisor about the possible benefits a 1031 exchange could have for you. It’s also important to note that I am a real estate agent and not an accountant, a QI, or an attorney. Please seek legal and financial advice from those who are qualified.
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