Part of a successful Section 1031 tax-deferred exchange is meeting the requirement that potential replacement properties be properly identified within forty-five calendar days after the closing of the relinquished property.
Time out for definitions: Replacement property = the properties that an exchanger would consider purchasing to replace the ones s/he is selling; Relinquished property = the property or properties that the exchanger is selling.
Some property owners who have thought about starting a Section 1031 tax-deferred exchange are concerned about
the 45-day period being too restrictive. For that matter, many exchangers who have both successfully and unsuccessfully attempted an exchange feel the same way. I can remember a time or two when I've had similar feelings in my own exchanges. Let's break it down, though...
While it is true that once the 45-day clock starts to tick, the only thing that can extend that clock is a Presidentially-declared disaster area (and I, for one, would hate to count on that happening in my particular area to gain some extra time), in reality most exchangers have quite a bit longer than 45 days. Here's why I say that:
No one decides to do a tax-deferred exchange in a vacuum. What I mean is, when you decide to sell a property with the intention of reinvesting the proceeds through an exchange, you are aware that you're doing it. So you start your marketing process today, let's say. Along with your marketing, you are likely thinking about what you would like to buy with the proceeds, so you start looking. In most cases, it takes some time to find a buyer for your property. Let's say it takes 30 days to get a contract on the property you're selling. How long does it take after that to close the sale? Again, in most cases, probably another 30 days at least. In today's somewhat slower market, are those two estimates optimistic? Maybe so, but let's go with them. That's 60 days that are available before the 45 days starts.
So what would you do if you found a property that you wanted to buy prior to the time you had a contract on the one you were selling? You have a couple of options. One would be to employ what is known as a reverse exchange, which I suggest we leave to another blog down the road. What I suggest might be the simplest solution would be to attempt to put together a purchase agreement that is subject to the sale of your relinquished property.
To conclude, with proper planning, the 45-day identification period does not have to seem quite so troublesome as it might outwardly appear.
Ken Tharp
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