So, you've sold, or you're considering selling, your investment property and you've decided to do a 1031 exchange. According to the Internal Revenue Code (IRC) §1031, anyone selling their investment property has 45 calendar days to identify the replacement property or properties. But do you understand the options and rules governing the 45 days?
While you will need to identify the new property or properties to your accommodator/qualified intermediary during the 45 days, they do not need to (yet) be under contract. The 45 days countdown begins after the close of the property that you just sold. You have a total of 180 days since close of your relinquished property to close on the new property or properties you identified.
One of the reasons many people choose to utilize Perch Wealth's DST platform is because some find the 1031 identification process potentially much easier and simpler to comply with in regard to their investment property exchange.
So what are the various options available to investors when identifying?
Under the 3-property rule, the investor taxpayer can identify up to 3 properties, regardless of the fair market value of the properties. You do not have to acquire all 3 of the properties that you identify if you utilize this rule, but you will need to close on at least 1 of the properties.
If you are intending to diversify your real estate investment dollars, for example by investing in DSTs and want to identify more than 3 possible investments, than you will choose to not rely upon the 3-property rule.
Pursuant to the 200% rule, a 1031 exchange investor may identify and close on any number of properties, so long as the aggregate fair market value of the properties identified during the 45-days does not exceed 200 percent of the aggregate fair market value of the relinquished property when it was sold. For example, if you sold your property for $1,000,000, you could then identify as many properties as you wish, so long as the fair market value of those identified does not exceed $2,000,000.
If an investor finds herself/himself in need to identify more than 3 properties and more than 200% of the aggregate value, as noted in the options above, then that investor can rely upon the 95% rule. But be careful, because it is challenging to comply with the 95% rule since it requires the investor to close on at least 95% of the properties that were identified. Since it is practically difficult to satisfy the 95% rule, virtually all investors will normally fall within the 3-property or 200% rules noted above.
What information do you need to provide to your accommodator/qualified intermediary (QI)?
You can provide the street address, assessor's parcel number, and/or legal description to your QI. Make sure this is accurate. Be as specific and unambiguous as possible.
Remember to pay close attention to the above rules because if you do not, your exchange could potentially be disallowed by the IRS and/or state tax agency if you are audited. Early planning is important, so beginning to think about your DST replacement properties before you sell your relinquished property can really help in possibly lowering any stress often associated with complying with the 1031 exchange rules.
Work with an experienced and knowledgeable qualified intermediary as well as a DST investment firm that is readily familiar and knowledgeable with how to guide you through this process. The advisors at Perch Wealth can help you with your 1031 exchange. By utilizing and investing in the DST structure, Perch Wealth can potentially help ensure that your 45 days ID period goes smoothly and efficiently.
Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.
Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.
1031 Risk Disclosure:
- * There is no guarantee that any strategy will be successful or achieve investment objectives;
- * Potential for property value loss - All real estate investments have the potential to lose value during the life of the investments;
- * Change of tax status - The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- * Potential for foreclosure - All financed real estate investments have potential for foreclosure;
- * Illiquidity - Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- * Reduction or Elimination of Monthly Cash Flow Distributions - Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- * Impact of fees/expenses - Costs associated with the transaction may impact investors' returns and may outweigh the tax benefits