1031 Exchange - Process

2 Replies

I am looking to do a 1031 exchange , but have a question regarding the process. Does due diligence on the property need to be conducted before or after identifying the property within the 45 day window? For instance, what if I identify a property for the exchange, but then, after performing due diligence, decide against purchasing the property due to a defect that is uncovered during the inspection? Would a new 45 day window be initiated from that point, would I lose the ability to conduct the exchange, or neither? 

As a side note, I understand that you may identify up to three (or more) properties with the intent of only closing on one of them. Consequently, if one didn't pass inspection, you would have two other properties to choose from. For purposes of this example, what if you identified three properties but then decided you did not want to close on any of them?

Thanks in advance for your help!

@Conner Parsons ,

The 45 day list is for real and rigid but there's some things you can do to mitigate the risk and angst associated with it.

The 45 day clock starts with day one of closing.  But it only becomes set in stone on day 46.  So through day 45 the list can be modified however you want.  On day 46 it can't be changed at all.  So to answer your last question first.  If you are after day 45 and all of your properties have fallen through you cannot add to the list.  You may only complete your exchange using properties on the list.   I actually had a client a few years back who had to go the buyer who out bid him for  a property and offer that person a sum to then sell to him so he could complete his exchange - ouch!

The best way to mitigate the 45 day issue is to shop early shop hard and get into contract as soon as you can.  You may even contract on your new property before the closing of your sale.  Only the closing of the sale must precede the closing of the purchase.

@Conner Parsons a usual @Dave Foster is spot on - in fact I would defer to him on pretty much anything 1031 related. Also, remember that you *can* identify more than three properties (if you really feel like three isn't enough choice or you have a ton of value you'd like to spread around between multiple replacement props) but you have to follow two rules:

1. You can identify as many properties as you like as long as their aggregate value does not exceed 200% of the total net sales value of your current prop. So if you're selling a rental worth $500k (using round numbers for ease), you could identify as many properties as you like, heck you could pick out 20 if you wanted, as long as they don't all add up to more than $1 mil (200% of $500k).

OR

2. You can identify as many properties as you like, with no total value limit, as long as you purchase 95% of that value. So you could identify 15 properties, but if those 15 props add up to $3 mil, you're on the hook for $2.85 mil (95% of $3 mil), regardless of the value of your current prop. If you're selling that $500k rental but identify 15 replacements worth a total of $3 mil, you gotta find that extra $2.35 mil somewhere to keep the 1031 valid.

Most people stick to the 3-prop rule, some use the 200% rule, but you have to be verrry careful with that 95% exception because, unless you have tons of value to play with or have a bunch of extra cash you're willing to throw into the deal, you could be on the hook for a very big sum. Luckily, a good QI like Dave is there to help make sure everything goes smoothly and that you understand the process. 

If you don't already have a QI on your team (and if you're asking BP about this maybe you don't have one yet) I would make that your very next step. It's good to have an understanding of the process on your own, but a 1031 can't be executed without a QI anyway, and really they are going to be the #1 best resource for this kind of info.

Best of luck!

Clayton