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Replacement Property Rules

“IT IS CRITICAL TO FOLLOW THESE REQUIREMENTS”

The identification period in a delayed exchange begins on the date the Exchanger transfers the relinquished property and ends at midnight on the 45th calendar day thereafter. To qualify for a §1031 tax deferred exchange, the tax code requires identifying replacement property:

  • In a written document signed by the Exchanger;
  • Hand delivered, mailed, telecopied, or otherwise
  • Before the end of the identification period to;
  • Either the person obligated to transfer the replacement property to the Exchanger [generally the “Qualified Intermediary”] or any other person involved in the exchange other than the taxpayer or a disqualified person.

An identification notice must contain:

  • An unambiguous description of the replacement property
    (i.e. legal description, street or distinguishable name)
  • Exchangers should note the address of the relinquished property
  • The type of property should be described in a personal property exchange

 

ADDITIONAL IDENTIFICATION ISSUES

Exchangers acquiring a property which is being constructed must identify this property and the improvements in as much detail as is practical at the time the identification is made. Exchangers who intend to acquire less than a 100% ownership interest in the replacement property should specify the specific percentage interest. Exchangers should always consult with their tax and/or legal advisors about the specific identification rules and restrictions.

Any properties acquired within the 45-day identification period are considered properly identified. An investor has the ability to substitute new replacement properties by revoking a previous identification and correctly identifying new replacement properties as long as this is done in writing within the 45-day identification period.

Although Exchangers can identify more than one replacement property, the maximum number of properties that can be identified is limited to:

  1. Three properties without regard to their fair market value (3 Property Rule);
  2. Any number of properties so long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all relinquished properties (200% Rule);
  3. Any number of properties without regard to the combined fair market value, as long the properties acquired amount to at least ninety five percent (95%) of the fair market value of all identified properties (95% Rule).

 

As you know the closing has officially closed on May 28, 2015 which means that your identification period for the replacement property expires on Sunday July 12, 2015.  You have up until that time to send me the replacement property(s) you are considering and you must close on such property(s) on or before Tuesday November 24, 2015.  Please put these important dates in your calendar so that you do not miss any deadlines.  The best way to get me this information is via email or fax both of which are included in my signature line.  In the meantime, I will be sitting on the sidelines while you find your replacement property.  Please keep in mind that I have relationships with both residential and commercial realtors all over the country should you need a referral to one to assist in locating a replacement property and if you utilize one of my brokers within my referral network, they you can get reimbused up to the total QI Fee paid of $775 or fee actually paid, whichever is less.   As you know, they do not charge you because their fee is paid by the seller in almost all cases.

 

Finally, and this is very important, if you are concerned in any way that any of the properties that you have or are planning to identify are not going to close or are not really anything you are serious about or if your tax liability is such that you would never want to end up in a situation where you have that obligation because something happened that prevented you from closing one of the identified properties, then there are failsafe options like TIC’s  (Tenants in Common) and DST’s (Delaware Statutory Trusts)  that many clients will name as a failsafe so that even if what they really wanted does not materialize they still can buy one of these things to avoid the taxes and then at some point in the future you can also do a 1031 exchange out of them.

 

I want to be clear that I am not an expert on the selling side of these items as they both have positives and negatives like everything in life but I do know the players in this space, but even more important, I can probably direct you to the more reputable institutions.  So if this is something that would interest you, please feel free to email or call me as I will be happy to put you in touch with the people that are able to provide you with all the options.  Bottom line is that these type of products were created years ago for use of money into a 1031 exchange.  It has been reported to me from previous and existing clients that they earn around a 5-7% annual cash return paid quarterly and also experience around a 4-5% in annual appreciation.

 

They can own anything from a high end Apartment complex in downtown Dallas, Texas, several of the taco bells, CVS,  or Starbucks’s buildings etc.…. that are all on triple net leases as well as they could own High Rises in downtown New York city so you, as the exchanger, because these items are set up solely to attract 1031 exchange money, always have that option because you have no involvement in the management while at the same time you still own some type of fractional interest of real property.

 

Again DST’s and TIC’s have a lot of similarities but probably an equal amount of differences.  Having said that, I am not an investment advisor and I do not sell these products but I would be doing you a disservice if I do not at least let you know they exist because I DO NOT WANT you to call me on day 60 and tell me that all the properties that you have identified have fallen through and that I have to deliver the bad news that there is no way to avoid paying the taxes because you have to actually purchase what you identified in the 45 day period following the initial sale.

 

From my understanding these things can get bought and closed in a few days if required but you certainly do not want to wait until the last second and the minimum investment I believe is $100,000 so if you have interest call or email me and I will give you a few names to call so you can do your own calls to find out more details and do your own vetting of these folks as most I have not necessarily met in person but the names I will provide to you are the ones that previous clients have spoken very highly of.

 

The most important thing is that if you elect to identify them as a failsafe you speak and vet them yourself prior to the expiration of the 45 day identification period because you do not want to list someone you have not spoken to unless it is last minute and that is your only option.  Then if you finally speak to them on day 60, for example, and are not comfortable you can always pay the taxes as listing them certainly does not force or require you to purchase their products.  It is solely a failsafe and many people think of it as a temporary parking spot until they can find what they are really looking for.  Alternatively, many of my clients do 1031 exchanges solely to get in one these two products and continue to exchange in and out as they love the cash flow and lower risk, as they tell me, and lower volatility that they get with the stock market.