Is a 1031 exchange right for me?

Question

A few years ago I purchased an investment property in another state. Although not listed for sale, I recently received an unexpected offer which was enough to motivate me to sell.

Now that the contract is about to be signed, I'm scrambling to figure out how to reinvest my gains to avoid paying capital gains tax.

I've been reading up on the 1031 exchange and this sounds like something that I'm interested in, however, the rules are very specific and there are time constraints. I feel as if I may end up being "rushed" into purchasing a bad investment for the sake of avoiding paying capital gains tax.

From what I'm reading, most who are doing a 1031 already have another property in mind, which I do not at this time.

So here's my issue. I'm going to have a fairly large sum of cash (to me) that I want to reinvest in a multiplex where I currently live with hopes of finding a property that will offer a similar return to my current property. This is going to take time.

I'm new to investing in the area that I'm in and have no agent. I have to deal with selling the other property while hoping to find the ideal property in my area that meets my criteria.

If I'm understand correctly, I have 45 days after the close of my current property to identify my next investment. My closing is going to be somewhere around Sep 1, meaning that I have a limited amount of time to find a "good" agent and find the property that I'm looking for.

Is the 1031 really the best option for me? Are there any other options that will allow me to take my time finding the perfect property?

Dave Foster · Answer

@Thomas  Lam

I think most of your questions got answered in your latter post but let me address the nuance in the identification period and see if I can put your mind at ease.

From the day you close you have 45 calendar days to identify your potential replacement properties.  You can name up to three properties and it doesn't matter how much they are worth.  If you want to name more than three you can but the total value of all the properties on the list can be no more than 200% of the value of what you sold.  So if you're selling your property for 300K then you can name any three properties you want.  Or you can name 4 or more properties as long as their aggregate value is not more than 600K.

There is another exception but it only applies in an exchange where you will be purchasing many smaller properties. So these are the two scenarios you will be dealing with if you are trying to go from your one property into a multiplex.

Yes the property you will purchase has to be on the list so the 45 days is critical.  But being able to identify more than one as potentials makes it a little easier.  Many of our clients will use one of those spots for a place holder - a property that might be held by a friendly party who would be willing to sell in a pinch.  Or a property that is likely to be on the market for a while but whose owner may soften as time goes by.

It all depends on your goals and your gain of course.  But the 1031 can be a powerful ally to you.  There is no penalty for attempting and failing to compete a successful 1031 exchange.

Stuart Birdsong · Answer

One thought might be that if you're concerned about the time frame,  ask the buyers to extend the closing date to allow you to put the right pieces in play.

Thomas Lam · Answer

@Dave Foster

Good info here. Thanks for taking the time to reply.