The proper identification of replacement property within 45 days seems simple enough. So, why does it create enough stress to cause an exchange to fail? Here are a few concerns and solutions to keep in mind regarding replacement property.
Forty-five days. 1,080 hours. It sounds like all the time in the world. No, it’s not! Showings, surveys, inspections, environmental reports and pest inspections can drag out the process. Lawyers and title companies are typically closed on weekends and holidays. Remember, the IRS counts 45 calendar days, not business days. No excuses, no gaps and no days off.
Solution: Do not wait until the relinquished property closes before starting to look for desirable replacement property. The average days between the date of an Agreement of Sale and home closing is between 55 and 70 days. Use that time to search for replacement property so it can be acquired immediately after the relinquished property closes.
When does the perfect property come on the market? After the identification (ID) form is submitted. At least, it seems like it. If you are still within the 45-Day Identification Period, you can change your ID. Keep in mind the rules of identification.
Solution: If you have changed your mind and your ID several times, alert your qualified intermediary (QI) to revoke, in writing, before midnight on the 45th day. The IRS allows no ID changes from day forty-six to day 180.
We believe the best qualified intermediaries are the ones who review, then accept. Just because you have closed and your money is now held by a QI does not mean that you have an ID form. Also, don’t wait until Day 45. Sending anything late on that day does not allow your qualified intermediary to review your identification, notify you of a problem and allow you to send a corrected ID before midnight.
Solution: Communicate with your QI. We have witnessed many QIs jump through fiery hoops to help an exchanger. As vigilant as they are, they cannot change the tax law or decide for you. If you must delay, be sure to send a draft, in advance, for review.
Remember the rules. You can identify up to three property(s) (can acquire one, two or all three), identify any number of replacement property(s) so long as the fair market value of all identified properties does not exceed 200% FMV of what was sold, or identify any number of property(s) with fair market value greater than 200% (but the taxpayer must acquire at least 95% of what was identified).
Solution: Select an advisor who is willing to help.
180 days, that’s when. Scenario: Two properties are listed on the ID because one is a back-up. Good idea. However, after one property is acquired and the exchange is outside the 45 Identification Period, any excess funds will not be released until the end of the 180-Day Exchange Period.
Solution: Close on everything during the 45 ID period. It may seem impossible, but most of our clients do just that.
We do not cover every aspect of IRC Section 1031. Instead, we encourage investors to build a team of trusted advisers and seek help to complete a successful 1031 Exchange.