My 45th day is coming up. What happens if I can't close on any of the 3 identified properties ?
With a hot real estate market and multiple offers on properties, can I change properties if I'm outbid on initial 3 properties?
From what I have read, If I don't close of any of the 3, it would be a failed exchange and I would get taxed on the money sitting with the 1031 company, is this true?
Any advise would be greatly appreciated.
@Jesse Murillo yes once you have identified your three properties, if you do not actually close on one or more of those properties it would be a failed exchange. I’m in the middle of an exchange too so I’ve been learning all about them.
If you did get into a situation where it was a failed exchange maybe look at Opportunity Zones as another option? I’m currently looking at those too to see if that’s a viable option. Hope that helps!
You might also look into a Monetized Installment Sale to rescue a failing exchange. This approach defers all capital gains taxes for 30 years and delivers 93.5% of the net sales proceeds in cash (less payoff of any financing on the relinquished property).
Thank you both for your input, good alternatives to research!
@Jesse Murillo As long as you're within your 45 day identification you can simply shop for more properties. The list does not "go hard" until the end of day 45 and you don't have to close during that first 45 days. But this is why the identification period is so important - if you're past your 45 day period then the properties on your list are the only properties you can purchase that will satisfy the 1031 exchange. It is the property not the owner that matters unfortunately. So if you get outbid for a property and you are past your 45 day window the IRS's attitude is that you can still buy that property - just from a different owner.
There is no penalty for not completing a successful 1031 exchange. If you can't find good replacements or if you lose the options on your list and are past the period then let your exchange die. You'll pay the tax on the profit from your sale (not the proceeds being held) but no penalty.
Dave Foster - thanks for the response.
For example, if I bought a home for $227k selling (put down $50k) and sold it for $270k, I would only pay taxes on the $43k ? Not the $93k I would have in proceeds?
I'm reading I can also identify more than 3 properties as long they don't go over 200% of what my investment property sold for.
@Jesse Murillo , correct on both counts! With one caveat - Your profit would be $43K but you'd also have to add back in depreciation recapture which is a hidden little gotcha that many times ain't small.
You can re-identify as long as you're in your 45 day identification period. Sometimes it's harder to get a deal when you're on the purchase side of the 1031 because the listing agent knows you're on a time frame. You would have to run the numbers but it's usually better to buy something at market price, keep the money working and avoid paying taxes vs. paying taxes and not have the money working.
One additional thought to what Jeff said about the leverage a selling broker has over a 1031 buyer - There is no requirement to reveal the 1031 when going into contract. All parties have to be identified but we always prepare notices to be handed out at closing to avoid any possibility of a listing broker from using that info to their advantage.
Most standard MLS contracts will have pre printed addendums or check the boxes to give parties the option to do 1031s without requiring a separate addendum that reveals your hand. Or you could simply make the contract assignable. That does not disclose your position in the 1031 at all but still allows us to accomplish everything we need to do for the 1031.
Today is my 45th day.
I will submit at least 5 properties, but the odds of closing one of them are very low.
One final question.
Could I withdraw from having to do a 1031 even if I submitted my properties? For example, say my Tax implications wouldn't be that much do deal with a 1031.