The Trick To Easy 1031 Property Identification

By Author: Trisha Coppley
Total Articles: 46
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Making a 1031 exchange isn't always an easy endeavor; there are many rules, restrictions, and nuances that must be taken into consideration during the course of the process, and myriad potential complications that may crop up. Fortunately, though, most of these roadblocks can be avoided by way of a bit of forethought and planning. A key step in the 1031 process that can be simplified considerably provided that one does his homework beforehand is the identification of a piece of replacement property.

By far the easiest way to make a identification is to be sure {conduct the closing on the purchase of your chosen replacement property within 45 days of closing on your relinquished property's sale. If you manage to purchase a replacement property during this period, you will be considered to have identified the property by virtue of closing on its purchase. In this way, you can absolve yourself of the responsibility of making an identification on paper.

Allowing this deadline to pass without closing on your purchase means you will be obligated to submit a written identification, which will inevitably make ...
... the undertaking much more complicated and labor-intensive. It would take more than a brief overview to discuss all of the legal convolutions that can come come up in making a written identification, but here I will offer a brief overview of the 2 basic ways in which these identifications can be made.

The first of these is the 3-Property Rule, which indicates you you are allowed to identify properties regardless of value, however they cannot be more than three in number. Though this rule is simple enough on its face, in reality it is often difficult to ascertain whether a property comprises one or several discrete pieces of real estate. As an example, if you were considering a piece of property sold in several parcels, you would be forced to consider factors such as whether or not the parcels are contiguous, and whether you would be buying them under one purchase agreement or several separate agreements. Your second option, the 200% Rule, allows you to identify any number of properties, however the values of the pieces of property you identify must not total up to more than 200 percent of the value of your relinquished property.

Whichever rule you choose, it is essential to be cautious when submitting identifications on paper, as the result of an incorrect identification is likely to be an invalidated exchange. This hassle can fortunately be mitigated, or indeed bypassed completely, with a bit of planning. As an example, you can search for a suitable replacement property in anticipation of a 1031 exchange, and, for added certainty, you can draw up a purchase agreement with the seller. By doing this, you can rest assured that you will be able to purchase your chosen replacement within the 45-day time frame, thereby avoiding the muss and fuss that results from submitting your identification on paper. If, however, you find yourself in a situation in which it will be impossible to purchase your replacement property within the 45-day window, don't be afraid to discuss any legal issues or doubts with a qualified expert, as a misstep may result in your exchange being deemed invalid.