Property Investors - Find Your Replacement Property Before Beginning A 1031 Exchange

Making a Section 1031 exchange isn't always an easy endeavor; there are many rules, restrictions, and nuances that must be taken into account as one moves through the process, and myriad possible complications that may crop up. The good news, however, is that many of the contingencies involved in an exchange can be mitigated by a bit of forethought and planning. One key part of the 1031 process that can be greatly simplified if one does his homework at the outset is making an identification on a suitable replacement property.

By far the easiest way to make your identification is to be certain {conduct the closing on the purchase of your chosen replacement property within the 45 day period after closing on the sale of your relinquished property. If you are able to conduct your closing within this time frame, you will be considered to have identified the property by virtue of the fact that you have conducted the closing. In this way, you are able to free yourself from the obligation to make an identification in writing.

Missing this deadline means you will be obligated to submit a written identification, which will inevitably make the process much more work-intensive and complex. It would take more than a short overview to discuss all of the legal minutiae that you may have to consider in submitting an identification on paper, but here I will briefly discuss the two essential rules under which these identifications can work.

The first is the 3-property Rule, which indicates you can identify properties of any value, however the properties you identify must not number more than 3 in total. While this rule is easy enough in concept, in practice it is often difficult to figure out whether a replacement property comprises one or several . For example, if you were dealing with a property made up of 3 or 4 parcels, you'd have to consider quite a few factors, including whether the parcels are contiguous, and whether you would be buying them under one purchase agreement or several separate ones. Your second option, the Two Hundred Percent Rule, lets you choose any quantity of replacement properties, however the values of the properties you have identified can't total up to greater than 200 percent of the value of your relinquished property.

Regardless of which rule you choose, it is essential to be cautious when identifying replacement properties in writing, as the result of an incorrect identification is likely to be an invalidated exchange. This hassle can, however, be mitigated, or indeed avoided entirely, with a bit of foresight. For example, you could search for a suitable replacement property in anticipation of a 1031 exchange, and, for additional surety, you can make a purchase agreement as well. In this manner, you can make absolutely certain that you will ultimately be able to close on your chosen replacement within the forty-five day time frame, avoiding the needless hassle that comes with submitting your identification in writing. If, however, you find yourself in a situation in which it will be impossible to purchase your replacement property within the forty-five-day time frame, don't hesitate to discuss any legal considerations with a qualified expert, as a misstep may result in the invalidation of your exchange.

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