1031 Exchanges: Don't be Pressed for Time
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A 1031 exchange may initially seem like an overwhelming and intimidating process with its numerous rules and seemingly endless paperwork. However, the entire experience can be effortless and hassle-free for the real estate buyer if they understand the process and work with a qualified team of professionals.
One of the initial and most daunting obstacles to completing a 1031 exchange is the timeline. Many real estate buyers are unable to defer their capital gains tax because they are unable to identify and close on the replacement property in the allotted time. In a 1031 exchange, a real property owner defers paying capital gains taxes on the sale of a property if, within 45 days of closing, they identify a replacement property and are able to close on that property within 180 days from the original sale. The 45-day rule and the 180-day rule are very strict and are not extended should the 45th or 180th day fall on a Saturday, Sunday or legal holiday.
So what does all that mean? After a real estate buyer sells the investment property, the buyer has 45 days to designate the qualifying replacement property. The buyer can identify up to three potential replacements (3-property rule) by sending a written notice to the seller or their qualified intermediary. Then you have another 135 days to complete the purchase. But if the tax-filing deadline falls earlier, that will be your deadline. You can extend your deadline by filing for an extension on your taxes.
More than 95% of 1031 exchanges use the 3-property rule, but real estate buyers can also try the 200% rule and the 95% exemption. The 200% rule states that the real estate buyer may identify any amount of properties as possible replacements for your relinquished property as long as the aggregate value of those properties does not exceed 200% of the value of your relinquished property. And for the 95% exemption, the buyer may identify any amount of properties as possible replacements for your relinquished property as long as you end up purchasing at least 95% of the aggregate value of all properties identified.
Although 1031 exchanges are becoming more commonplace, issues such as the timeline rules may dim the allure of one-on-one property swaps. An alternative to the one-on-one property swap is Tenants-in-Common (TIC) ownership. An individual can buy an undivided fractional interest in real property such as an office building. He or she can invest in higher-quality, institutional grade properties. For example, a real estate buyer with $500,000 could purchase a 10% interest in a $5 million property. TIC ownership provides smaller investors with greater access to better buildings and allows buyers to avoid most of the day-to-day headaches associated with property management.
FOR 1031™ is a national leader in providing 1031 Tenants-in-Common replacement properties. By specializing in institutional quality exchange properties for use in 1031 TIC real estate transactions, FOR 1031 provides a means for the individual real estate owner to participate in ownership of properties previously beyond their individual financial ability.
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