The Trick To Easy 1031 Property Identification

by: Ravok
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Making a 1031 tax exchange isn't always an easy endeavor; there are many rules, restrictions, and legal nuances that must be duly considered as one moves through the exchange, and myriad potential obstacles that may arise. The good news, however, is that many of the risks involved in the 1031 process can be mitigated by way of forethought and planning. A key step in the 1031 process that can be simplified considerably if the investor makes the necessary preparations at the outset is making an identification on a piece of replacement property.

By far the easiest approach to making an identification is to make sure {conduct the closing on the purchase of your replacement property within forty-five days of closing on your relinquished property's sale. If you manage to conduct your closing within this period, you will be seen as having made your identification by virtue of the fact that you have conducted the closing. In this manner, you are able to free yourself from the responsibility of making your identification on paper.

Allowing this deadline to pass without closing on your purchase means that you will be obligated to submit a written identification, which will make the process much more labor-intensive and complicated. It would be unfeasible within the scope of this brief article to discuss all of the legal convolutions that can come into play in the course of submitting an identification on paper, but here I will briefly discuss the two basic rules under which written identifications can work.

The first of these is the ”3-Property Rule,” under which you can identify pieces of property regardless of value, but the properties you identify can't number more than three in total. Though this rule is easy enough in concept, in reality it is often hard to ascertain whether a property constitutes one or several. For example, if you were dealing with a piece of property sold in several parcels, you would have to take into consideration factors such as whether the parcels are contiguous, and whether you would be buying them under 1 purchase agreement or several different ones. Your second option, the ”200% Rule,” lets you identify an unlimited number of properties, but the values of the pieces of property you identify cannot total up to greater than 200 percent of your relinquished property's value.

Regardless of which rule you choose, it is essential to be cautious when identifying replacement properties in writing, as the result of an inaccurate identification is an invalidated exchange. This hassle can fortunately be mitigated, or even avoided completely, with a bit of forethought. For example, you could search for a suitable replacement property before even beginning the 1031 exchange, and, for added surety, you can make a purchase agreement with the seller. By doing this, you can rest assured that you will be able to close on your replacement within the 45-day time frame, avoiding the needless hassle that results from missing this deadline. If, however, you find yourself in a situation in which you will not be able to purchase your replacement property within the 45-day time frame, don't hesitate to bring up any legal issues or doubts with your tax adviser or other legal expert, as a misstep may result in the invalidation of your exchange.

About the Author

Maximize Your Tax Savings By Using A Reverse 1031 Exchange When Buying Or Selling Like Kind 1031 Exchange Real Estate. Visit http://www.Top1031Exchange.com To Learn More.

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