1031 Exchange Nomination

[Tyler Williams]

I'm selling a SF home to buy a commercial space for my office and would like to do a 1031 exchange. 

What if the deal on the property I nominate in the 45 day period falls through, and I purchase another property that was not nominated within the 45 day period, but I still close on the new purchase within the 180 day period?

Will it still qualify for a 1031 exchange?

[Bill Exeter]

Hi @Tyler Williams, 

Section 1031 of the Internal Revenue Code requires that an investor identify his or her potential replacement properties within 45 calendar days after the close of the sale of the relinquished property. They can change their mind at any time as long as they are still with in the 45 calendar day identification period but cannot change their mind or alter their identification after the 45 calendar day period has expired. Acquiring a property that was not identified during your 45 calendar day identification period will not qualify for 1031 Exchange treatment.

There are various ways in which you can plan ahead for your 1031 Exchange transaction in order to minimize this potential risk.

1) Start looking for potential replacement property as soon and you know you are going to list your relinquished property for sale. Do not wait until you're in your 45 calendar day identification period.

2) Enter into a contract for the purchase of your replacement property with an extended closing., And attempt to include options to extend the closing date should you need to do so in order to buy more time for locating suitable replacement properties.

3) You can try to lock up your potential replacement property through the use of leases, leases with options to buy, or just options. This way you will control the replacement property and then exercise your purchase option when you are ready to do so.

4) Consider purchasing your replacement property first by structuring a Reverse 1031 Exchange transaction, which allows you to close on your replacement property and then sell your relinquished property within 180 calendar days after the closing of your purchase of your replacement property.

5) Consider identifying multiple properties by using either the three (3) property identification rule or the 200% of fair market value rule in order to give you more properties to select from.

6) Research the idea of including syndicated Tenant-In-Common Investment Properties, Delaware Statutory Trusts Investment Properties, or Net Lease Properties as backup identified properties.

As you can see, there are multiple ideas/strategies that can be used in order to minimize the risk of not being able to acquire replacement property identified during your 45 calendar day identification period.