1031 rules 3 properties?

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1031 rules 3 properties?

Joshua Jones
Member since 2018 · 33 posts · 12 votes

So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

But how do you effectively choose 3 properties that may not be on the market in 180 days. 

Stuff around here flies off the shelf. 

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y

LOL. @Bill B., no way "everything".  But I do know that the 45 day period is the greatest causer of angst.  @Joshua Jones, if your QI hasnt already given you these tips then take heart.  

1. Treat the 45 day period not so much as an "identification period". but more as an "I gotta get this thing under contract" period.  You can't change the list after day 45 so you need to work as quickly during the 45 day period as possible.

2. If you hadn't closed your sale already you could have used the time before you closed your sale to also search and get under contract.  You can be under contract for your new property before your old property closes.  you just have to close the sale before closing the purchase.  Many of our clients will use the 30-60 days before sale to get their new property locked up.

3. Identify more than three - You can identify more than three as long as the total value of the list is no more than 200% of your sales price.  So if you're buying same price point as your sale you could identify 4 and it could work.

4. If the tax is huge then put a Delaware Statutory Trust on your list as a back up.  These can absorb your exchange and keep the tax deferred.  When they sell in 2-4 years you can 1031 back into bricks and mortar if the market has corrected (another choice of several of our clients).

5. If you hadn't already sold your old property you could have done a reverse exchange as @Jake Andronico and others suggested.  So you lock up your new property before you sell your old property.

6. If you can't find a good replacement then don't turn in a list and pay the tax - no one ever went broke paying tax on profit - it just feels like it.

The 45 days is so real that I actually put an entire section in my book on mitigating timing issues.


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  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    3y

    Just because it says 180 days, does not mean that you have to take that long to close. Perfect situation is that you go under contract to sell. Same day or next, you contract the property to buy and set the closing date a week or two later that your sell property. Do all of this at the same time.

    AFTER you have both properties under contract and you sell yours, you list the purchase property and you close a week later.

    I would NOT wait to close, and then start looking for the replacement property.

    0Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    3y
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 


     Why would a property need to be on the market for 180 days ?? If you find properties you close, I REALLY think you need to connect with those doing deals and learn hands on,,,, 

    0Reply
  • Joshua Jones
    OP
    Member since 2018 · 33 posts · 12 votes
    3y
    Quote from @Bob S.:
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 


     Why would a property need to be on the market for 180 days ?? If you find properties you close, I REALLY think you need to connect with those doing deals and learn hands on,,,, 

    I agree with that.

    I get that you don’t have to wait 180 days, but how in the world do you time it so that you sell something and find something you want to buy at the same time. 
    1Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    3y
    Quote from @Joshua Jones:
    Quote from @Bob S.:
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 


     Why would a property need to be on the market for 180 days ?? If you find properties you close, I REALLY think you need to connect with those doing deals and learn hands on,,,, 

    I agree with that.

    I get that you don’t have to wait 180 days, but how in the world do you time it so that you sell something and find something you want to buy at the same time. 

     Your network :) Deals are everywhere. I buy/ sell almost weekly. 

    2Reply
  • Glenna Wood
    So MD · Member since 2019 · 294 posts · 191 votes
    3y

    It's never a sure thing but by watching the market carefully, doing your homework months in advance, and marketing/pricing your sale correctly it's a powerful strategy for building wealth. Think through how important the 1031 is to your overall goals and be prepared to compromise on property choices if needed to make it work. Also plan ahead on the impact if it fails. 

    0Reply
  • Joshua Jones
    OP
    Member since 2018 · 33 posts · 12 votes
    3y
    Quote from @Bob S.:
    Quote from @Joshua Jones:
    Quote from @Bob S.:
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 


     Why would a property need to be on the market for 180 days ?? If you find properties you close, I REALLY think you need to connect with those doing deals and learn hands on,,,, 

    I agree with that.

    I get that you don’t have to wait 180 days, but how in the world do you time it so that you sell something and find something you want to buy at the same time. 

     Your network :) Deals are everywhere. I buy/ sell almost weekly. 


    Your net worth equals your network. I agree. 

    Just starting out here. Any recommendations on where to start growing my network. 

    I’m wanting to stay local to the Indianapolis and surrounding areas of the start. 

    0Reply
  • Kerry Noble JrPro Member
    Investor · Indianapolis, IN · Member since 2018 · 2k+ posts · 1k+ votes
    3y
    Quote from @Joshua Jones:
    Quote from @Bob S.:
    Quote from @Joshua Jones:
    Quote from @Bob S.:
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 


     Why would a property need to be on the market for 180 days ?? If you find properties you close, I REALLY think you need to connect with those doing deals and learn hands on,,,, 

    I agree with that.

    I get that you don’t have to wait 180 days, but how in the world do you time it so that you sell something and find something you want to buy at the same time. 

     Your network :) Deals are everywhere. I buy/ sell almost weekly. 


    Your net worth equals your network. I agree. 

    Just starting out here. Any recommendations on where to start growing my network. 

    I’m wanting to stay local to the Indianapolis and surrounding areas of the start. 


     Anything that youre looking for? I might be able to find you 3 properties off market

    0Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    3y
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 

    I assume you are working with a QI? If not, I'd chat with one asap. 

    There are three different methods to identify properties, but the 3 property/45 day is by far the most common. During that 45 day period, you can swap properties out as much as you'd like. In a competitive market, my suggestion would be to start making aggressive offers as soon as you are through the due dilligence period on the property you are disposing of. 

    Have your replacement properties under contract long before your 45 day period is up- ideally before you even close on the property you sell. 

    If you get past your 45 day period without a contract, the sellers for the three properties you have identified will have you against the ropes, that's not a fun spot to be in. 

    You could always do a reverse exchange too- less stressful, more expensive and complicated, but in competitive markets it can be worth it. 

    As a back up, you can keep a DST in your back pocket, but the exchange is the best way to go, IMHO. 

    Best of luck!
    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    Reach out to  @Dave Foster, he knows “everything”


    He also has a book you can read in a day on Amazon that will answer most of your questions. He’s walking me through my first 1031 every as I type. I sold June 30th and put a new build under contract July 15th. I’ve filled out my 45 day letter but I also hope to close a week from Thursday, on day 41. 
    . 
    180 days is being SUPER generous. After all, you have to identify your properties within 45 days. Do you really plan to take 135 days to close? Especially as you should have a big downpayment from your sale. Please just remember to reach out before you sell. You see so many posts about “I just sold my property, how do I do an exchange with all my money…” you don’t, it’s too late, you owe taxes. 

    1Reply
  • Jake AndronicoBusiness Member
    Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
    3y

    @Joshua Jones

    You can identify more than 3 properties within certain parameters within your 45 day ID period. 

    There is the 3 property rule, 200% rule, and 95% rule.

    I'm sure @Dave Foster can shed more light on these. 

    As Corby said, you could also do a reverse 1031 exchange as well if selecting properties in that short of a time frame is unnerving (which totally makes sense). 

    Curious to hear what you decide and I wish you the best of luck!!

    415-233-1796
    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    LOL. @Bill B., no way "everything".  But I do know that the 45 day period is the greatest causer of angst.  @Joshua Jones, if your QI hasnt already given you these tips then take heart.  

    1. Treat the 45 day period not so much as an "identification period". but more as an "I gotta get this thing under contract" period.  You can't change the list after day 45 so you need to work as quickly during the 45 day period as possible.

    2. If you hadn't closed your sale already you could have used the time before you closed your sale to also search and get under contract.  You can be under contract for your new property before your old property closes.  you just have to close the sale before closing the purchase.  Many of our clients will use the 30-60 days before sale to get their new property locked up.

    3. Identify more than three - You can identify more than three as long as the total value of the list is no more than 200% of your sales price.  So if you're buying same price point as your sale you could identify 4 and it could work.

    4. If the tax is huge then put a Delaware Statutory Trust on your list as a back up.  These can absorb your exchange and keep the tax deferred.  When they sell in 2-4 years you can 1031 back into bricks and mortar if the market has corrected (another choice of several of our clients).

    5. If you hadn't already sold your old property you could have done a reverse exchange as @Jake Andronico and others suggested.  So you lock up your new property before you sell your old property.

    6. If you can't find a good replacement then don't turn in a list and pay the tax - no one ever went broke paying tax on profit - it just feels like it.

    The 45 days is so real that I actually put an entire section in my book on mitigating timing issues.


    The 1031 Investor5137 Reviews
    WebsiteView Page
    5Reply
  • Joshua Jones
    OP
    Member since 2018 · 33 posts · 12 votes
    3y
    Quote from @Dave Foster:

    LOL. @Bill B., no way "everything".  But I do know that the 45 day period is the greatest causer of angst.  @Joshua Jones, if your QI hasnt already given you these tips then take heart.  

    1. Treat the 45 day period not so much as an "identification period". but more as an "I gotta get this thing under contract" period.  You can't change the list after day 45 so you need to work as quickly during the 45 day period as possible.

    2. If you hadn't closed your sale already you could have used the time before you closed your sale to also search and get under contract.  You can be under contract for your new property before your old property closes.  you just have to close the sale before closing the purchase.  Many of our clients will use the 30-60 days before sale to get their new property locked up.

    3. Identify more than three - You can identify more than three as long as the total value of the list is no more than 200% of your sales price.  So if you're buying same price point as your sale you could identify 4 and it could work.

    4. If the tax is huge then put a Delaware Statutory Trust on your list as a back up.  These can absorb your exchange and keep the tax deferred.  When they sell in 2-4 years you can 1031 back into bricks and mortar if the market has corrected (another choice of several of our clients).

    5. If you hadn't already sold your old property you could have done a reverse exchange as @Jake Andronico and others suggested.  So you lock up your new property before you sell your old property.

    6. If you can't find a good replacement then don't turn in a list and pay the tax - no one ever went broke paying tax on profit - it just feels like it.

    The 45 days is so real that I actually put an entire section in my book on mitigating timing issues.


    Thank you!  I haven’t sold anything yet. 

    Just planning ahead. 
    1Reply
  • Sam McCormackBusiness Member
    Real Estate Agent · Cincinnati, OH/NKY · Member since 2021 · 1k+ posts · 833 votes
    3y
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 


     Hi Joshua, I sent you a DM, check it out. It is for off market properties I get

    [email protected]859-443-4952
    Sam McCormack Realtor
    View Page
    0Reply
  • Harvey LevinPro Member
    Property Manager · Indianapolis, IN · Member since 2012 · 205 posts · 157 votes
    3y
    Quote from @Dave Foster:

    LOL. @Bill B., no way "everything".  But I do know that the 45 day period is the greatest causer of angst.  @Joshua Jones, if your QI hasnt already given you these tips then take heart.  

    1. Treat the 45 day period not so much as an "identification period". but more as an "I gotta get this thing under contract" period.  You can't change the list after day 45 so you need to work as quickly during the 45 day period as possible.

    2. If you hadn't closed your sale already you could have used the time before you closed your sale to also search and get under contract.  You can be under contract for your new property before your old property closes.  you just have to close the sale before closing the purchase.  Many of our clients will use the 30-60 days before sale to get their new property locked up.

    3. Identify more than three - You can identify more than three as long as the total value of the list is no more than 200% of your sales price.  So if you're buying same price point as your sale you could identify 4 and it could work.

    4. If the tax is huge then put a Delaware Statutory Trust on your list as a back up.  These can absorb your exchange and keep the tax deferred.  When they sell in 2-4 years you can 1031 back into bricks and mortar if the market has corrected (another choice of several of our clients).

    5. If you hadn't already sold your old property you could have done a reverse exchange as @Jake Andronico and others suggested.  So you lock up your new property before you sell your old property.

    6. If you can't find a good replacement then don't turn in a list and pay the tax - no one ever went broke paying tax on profit - it just feels like it.

    The 45 days is so real that I actually put an entire section in my book on mitigating timing issues.


    @Dave Foster who do you like for a DST

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Harvey Levin, There are plenty of choices of who to work with.  Anyone with the right securities license can sell them.  But a license doesn't make a good rep.  Rather than try to do a list and tick off any great broker I've worked with and  forget to mention - Here are some general thoughts (only from the mind of Dave):

    1. Search for someone whos less marketing and more analysis. It's tempting to go for the prettiest pony. But marketing won't make your DST perform any better.

    2. Ignore any rep who ways their DSTS are better because they are their DSTs. No rep ever made a DST work. Look to the sponsors. That's your due diligence.

    3. Don't work with a rep who is a stock broker who sells DSTs. Find the Real Estate professional who happens to have the right license. At their core DSTs are a real estate product. And they need to be underwritten like a real estate product not a traditional stock. Real Estate will perform like real estate in the same cyclical fashion whether it's in a DST or a NNN commercial lease, or just bricks and mortar you happen to own.

    The 1031 Investor5137 Reviews
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    4Reply
  • Mark Jones
    Property Manager · Indianapolis, IN · Member since 2022 · 150 posts · 59 votes
    3y

    I have a company I can refer you to for the exchange if you need it.  I would definitely start looking before you sell.  

    I would recommend going to Cireia meetings in Indianapolis to grow your network.  

    There is also a monthly REI networking event the 3rd Thursday of the month at @properties. 230 E 16th St, Indianapolis I just saw a post on it! Events like this will help you network. check out meetup as well.

    2Reply
  • Tyler LingleBusiness Member
    Real Estate Consultant · Indianapolis, IN · Member since 2021 · 440 posts · 292 votes
    3y

    Thanks for the shoutout to our event! 4:30-5:30pm there^ the more the merrier 

    [email protected]
    Roots Realty Co. 562 Reviews
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    0Reply
  • Tyler LingleBusiness Member
    Real Estate Consultant · Indianapolis, IN · Member since 2021 · 440 posts · 292 votes
    3y
    Quote from @Joshua Jones:
    Quote from @Bob S.:
    Quote from @Joshua Jones:
    Quote from @Bob S.:
    Quote from @Joshua Jones:

    So I have 45 days to make my list of 3 properties and 180 days to pull the trigger. 

    But how do you effectively choose 3 properties that may not be on the market in 180 days. 

    Stuff around here flies off the shelf. 


     Why would a property need to be on the market for 180 days ?? If you find properties you close, I REALLY think you need to connect with those doing deals and learn hands on,,,, 

    I agree with that.

    I get that you don’t have to wait 180 days, but how in the world do you time it so that you sell something and find something you want to buy at the same time. 

     Your network :) Deals are everywhere. I buy/ sell almost weekly. 


    Your net worth equals your network. I agree. 

    Just starting out here. Any recommendations on where to start growing my network. 

    I’m wanting to stay local to the Indianapolis and surrounding areas of the start. 


     I'm ready to meet anyone. We do investor meet ups and a happy hour. Info is above!

    [email protected]
    Roots Realty Co. 562 Reviews
    WebsiteView Page
    0Reply
  • Mark H. Porter
    Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    3y

    The three properties are not just three you like.  It’s three that you get under contract and then go through due diligence so you can make a choice of which one (or two, or three) to buy before the 180 point.

    If you have already closed on your downleg and have not started the search you are already in a precarious position.  This search and identification should have started as soon as you passed due diligence in your downleg.  You have done hustling to do.

    And I would think about changing your realtor.  They should have been on top of this.


    1Reply
  • Joshua Jones
    OP
    Member since 2018 · 33 posts · 12 votes
    3y
    Quote from @Mark H. Porter:

    The three properties are not just three you like.  It’s three that you get under contract and then go through due diligence so you can make a choice of which one (or two, or three) to buy before the 180 point.

    If you have already closed on your downleg and have not started the search you are already in a precarious position.  This search and identification should have started as soon as you passed due diligence in your downleg.  You have done hustling to do.

    And I would think about changing your realtor.  They should have been on top of this.


    This was hypothetical. Just trying to learn the process before I get there. 

    Here’s a new hypothetical:

    Lets say you purchase a distressed brrrr for $50k cash and after it’s rehabbed ($20k) decide to sell it for $100k instead of renting it out. 

    Now you have $100k cash. 

    Is $70k the basis?

    If so, could you use the $30k taxable profit to purchase another distressed property with a 1031?

    What happens if the basis is $100k?  Can you roll that from a 1031 into 2 like properties to not pay the taxes?
    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Joshua Jones, If that was a new purchase then in general terms yes.  If you sell it for $100 you have a 30K gain.  In order to 1031 you would have to have purchased that property to hold and not to flip fifst of all.  Second of all you must purchase at least as much as your net sale and use all of your proceeds in the purchase to defer all tax.  3rd, you can indeed purchase more than one replacement as long as they are on the 45 day list and their aggregate value is at least as much as your net sale.

    The 1031 Investor5137 Reviews
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  • Joshua Jones
    OP
    Member since 2018 · 33 posts · 12 votes
    3y
    Quote from @Dave Foster:

    @Joshua Jones, If that was a new purchase then in general terms yes.  If you sell it for $100 you have a 30K gain.  In order to 1031 you would have to have purchased that property to hold and not to flip fifst of all.  Second of all you must purchase at least as much as your net sale and use all of your proceeds in the purchase to defer all tax.  3rd, you can indeed purchase more than one replacement as long as they are on the 45 day list and their aggregate value is at least as much as your net sale.

    Thanks!
    1Reply
  • Mark H. Porter
    Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    3y
    Quote from @Joshua Jones:
    Quote from @Dave Foster:

    @Joshua Jones, If that was a new purchase then in general terms yes.  If you sell it for $100 you have a 30K gain.  In order to 1031 you would have to have purchased that property to hold and not to flip fifst of all.  Second of all you must purchase at least as much as your net sale and use all of your proceeds in the purchase to defer all tax.  3rd, you can indeed purchase more than one replacement as long as they are on the 45 day list and their aggregate value is at least as much as your net sale.

    Thanks!
    Dave’s wikid smot!
    0Reply
  • Eric FernwoodBusiness Member
    Realtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
    3y

    Hello Joshua,

    To date, we have successfully completed over eighty 1031 exchanges. In this post, I will discuss the basics of a 1031 exchange and the process we follow. Also, some proposed 2024 legislation that could end/limit 1031 exchanges.

    What is a 1031 Exchange?

    A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred.

    The actual process is simple and illustrated below:

    Be aware of the 45-day identification period. Although you only need to list up to three potential replacement properties, there is no guarantee that you will be able to acquire any of them. If you fail to do so, you will lose your tax deferment.

    Movement of Funds

    Another frequent question I receive is regarding how the proceeds from the sale of the relinquished property must be handled.

    The following diagram illustrates the flow of funds in a 1031 exchange: The funds are transferred from the closing escrow agent to the 1031 exchange agent. Once you close on the replacement property, the funds flow from the 1031 exchange agent to the escrow company handling the closing. It's important to note that the funds must never be in your hands, as this will void the 1031 exchange.

    Our Process

    The risk of losing the 1031 tax deferment due to being unable to close on the identified properties is a significant risk. We created a process that minimizes or eliminates this risk.

    Once your relinquished property is in escrow and all contingencies have passed, we get the replacement property or properties under contract before the relinquishing property closes. This is permissible as long as we close on the replacement properties after escrow closes on the relinquished property. We target to close escrow on the replacement properties within 2-3 weeks after the relinquished property closes.

    Using this approach, if the replacement property falls out for any reason, we have time to get another property under contract and complete due diligence inspections. Only after due diligence inspections do we know if we want to close on the replacement property.

    Some Considerations

    • Renovations cannot be paid for using the proceeds from the relinquished property. Some clients choose to pay capital gains tax on a portion of the proceeds and use that money for renovation.
    • Verbiage related to 1031 exchange may not be included in all purchase contracts. Ensure that your listing agent obtains the correct verbiage from your exchange agent and includes it in the agent-to-agent remarks, specifying that the 1031 text must be included in offers.
    • To fully defer capital gains tax, you must reinvest all proceeds from the sale into the replacement property. Any cash or non-like-kind property received during the exchange will be subject to capital gains tax.
    • If there is existing mortgage debt on the relinquished property, it is important to consider how it will be handled during the exchange. Any reduction in debt or cash received may be considered taxable boot, resulting in potential tax liabilities.
    • Qualified Use Requirement: Both the relinquished and replacement properties must meet the requirement of being held for investment or used in a trade or business. Personal residences or properties primarily held for personal use do not qualify for a 1031 exchange.
    • State Tax Considerations: While 1031 exchanges are allowed under federal tax law, not all states conform to these rules. It is crucial to understand state-specific regulations regarding like-kind exchanges, as some states may not recognize or fully conform to federal provisions. Consult with a tax professional familiar with your state's laws.
    • The Biden Administration's proposed FY 2024 budget includes the creation of "capped deferral" for 1031 exchanges. Under this proposal, taxpayers in FY2024 will only be able to defer capital gains up to an aggregated amount of $500,000 for each taxpayer ($1 million for joint filers). Source. If you are considering a 1031 Exchange, 2023 may be the last year to do it.

    If you would like to investigate moving your investments to Las Vegas, DM me.

    [email protected]702-358-8884
    FERNWOOD Team, KW VIP Realty520 Reviews
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