Making A 1031 {{{Tax|}} Exchange? How To Streamline The Property Identification Process

Making a Section 1031 exchange is not always an easy endeavor; there are many factors that need to be duly considered as one moves through the process, and myriad possible complications that may crop up. The good news, however, is that many of these roadblocks can be avoided by planning and forethought. A step in the 1031 process that can be simplified considerably if one makes the necessary preparations beforehand is the identification of a suitable replacement property.

The absolute easiest approach to making an identification is to be sure {to close on the purchase of your chosen replacement property within forty-five days of conducting closing on the sale of your relinquished property. If you manage to conduct your closing during this period, you'll be seen as having made your identification by virtue of closing on its purchase. In this way, you are able to absolve yourself of the responsibility of making your identification on paper.

Letting this deadline pass without closing on your purchase means you'll be obligated to submit your identification in writing, which will make the process substantially more complicated and labor-intensive. It would be unfeasible in the confines of this short essay to discuss all of the legal convolutions that can come come up in the course of submitting an identification in writing, but I will now offer a quick overview of the 2 basic ways in which these identifications can be made.

The first of these is the Three-Property Rule, which indicates you you are allowed to identify properties of any value, however they cannot number more than three in total. While this rule is simple in concept, in reality it may become hard to figure out whether a replacement property comprises one or several . For example, if you were dealing with a piece of property sold in three or four parcels, you'd be forced to consider factors such as the location of the parcels, and whether they are being sold 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 pieces of property you identify can't add up to more than 200 percent of the value of your relinquished property.

Whichever rule you decide to make your written identification under, 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, however, be mitigated, or indeed avoided completely, with a modicum of foresight. For example, you can search for a suitable replacement property before even beginning the 1031 process, and, for added certainty, you can make a purchase agreement with the seller. By doing this, you can rest assured that you'll be able to close on your chosen replacement property within the forty-five day time frame, avoiding the needless hassle that comes with missing this deadline. 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 bring up any legal considerations or doubts with tax adviser or other legal expert, as a wrong move may result in your exchange being deemed invalid.

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