1031 Exchange question -- what if you don't find a property?

Question

Hello,

I'm new here and have one burning question I have not yet found the answer to.

My husband and I are looking to sell an investment property and buy another one w/ the proceeds. I understand that the new property needs to be identified within 45 days and fully executed by 180-days of sale of the initial property.

My question is 1) how strict is the "identifying" period? Is it easy to change course?

And 2) If you opt for the exchange and then for whatever reason are unable to complete it, is there a penalty aside from whatever capital gains, etc. you would have paid selling outright without the exchange?

Many thanks in advance for the help!

Dave Foster · Answer

@Sarah Thornton, The way the mechanics of a 1031 exchange work is that your exchange will always be either complete or dead before you have to file your next tax return. If you complete a 1031 exchange your accountant files the form 8824 which reports the 1031 exchange. If your exchange dies or fails to complete then the accountant simply take the 1099 that was given to you by the title company at close and files your tax return as if the 1031 never happened.

Bottom line - there is no penalty for starting and not completing a 1031 exchange.

But - there is no give to the time lines at all as others have said. If you miss a deadline your exchange dies.

Bottom line - there is no penalty for starting and not completing a 1031 exchange.

But - there is no give to the time lines at all as others have said. If you miss a deadline your exchange dies.

Bill B. · Answer

There is no penalty for non following through. You pay the QI their fee (pry $1,000 or less for a basic exchange) and you then owe the taxes. If you identify a property then you can wait the full 180 days to “fail” so that you owe the taxes next year. Both 45 and 180 day limits are exact days, not business day so if it falls on a Sunday it’s Sunday.

Sarah Thornton · Answer

Dave, thank you for your super helpful answer! :)

Jon Taylor · Answer

@Sarah Thornton,

As a rule, the only way to extend your 45 days is on the front end! Some strategies include a seller option to close within a date range, allowing you to have an extension on the front end, and close very quickly. Another idea is to start the identification process now! There is no rule that you can't put a property under contract prior to the close of your relinquished property. The 45 days is not flexible (which is why you can identify three addresses and only close on one.

If you begin the 1031 process with your intermediary, you will not be refunded your QI fee, and you'll tie your money up for a minimum of 45 days (and in many cases for up to 180 days).

Rebecca Six · Answer

The identifying period is absolutely strict. I am not an expert but we can have done a few 1031 exchanges.

Sarah Thornton · Answer

Thanks, Alex! I'll let you know.

Sarah Thornton · Answer

Awesome, Bill. thanks so much for your helpful reply! :)

Alex Evans · Answer

Hey @Sarah Thornton

I can get you the information of a 1031 intermediary if you need one!

The identification period is strict to that 45 days.

Sarah Thornton · Answer

OK, thank you! Do you know anything about a penalty for not executing on a 1031?

1031 Exchange question -- what if you don't find a property?

1031 Exchange question -- what if you don't find a property?

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