Doing a 1031 Exchange in a Seller's Market

It's a seller's market here in Austin, and in much of the country.  There is very little inventory, and some properties are getting multiple offers the minute they hit the market.  How does this impact a 1031 exchange?  Since sticking to the timeframe laid out in the 45 day and 180 day rules is a must, planning the execution of the exchange becomes key.

First, DO NOT wait until the last minute, (i.e. the 45th day) to identify your 3 properties, without ever really looking at or considering them in detail.  You'd be surprised how often people wait until the last few days, then begin to look for replacement properties.  The process of looking for a replacement property should begin when you know you will close on the relinquished property, likely a few weeks or so before the actual closing.

Keep in mind that in a seller's market, some of the properties you are considering may not even be available once you are ready to make an offer.  And there's no telling if the offer you make on the first property will even be accepted and you'll go under contract.  It is wise to at least have one property that you can make an offer on in mind very soon after you close.  If it does not go through, identify some other properties that are also acceptable to you, and don't spend too much time hesitating or negotiating.  Remember, the capital gains you are saving is worth a little bit of wiggle room in negotiating, especially from the buyer side.

If you've waited until the last day to identify your three properties, then you must end up closing on one of them.  Don't wait to get one under contract, or you could come down to your last choice, and very little negotiating room, or worse, no choices at all, and a failed exchange.  Even though you have, in theory, 4 1/2 months until you have to close, this again becomes a case of "don't wait till the last minute".

Another solution to all of this is to do a Reverse Exchange, which I will cover in another post!  Visit us at 1031 Exchange Austin for more information on this and other 1031 topics.

Top Qualified Intermediaries and Their Qualifications

It's important that you choose a good qualified intermediary in a 1031 exchange, in the same way that you should choose a good realtor.  Both of these advisors can guide you through an exchange smoothly, or cause it to run into obstacles.  And, since extra care needs to be taken in a 1031 exchange transaction, it is best to choose wisely right from the beginning.

An intermediary should first consult with you about your individual situation.  Just like your real estate agent, they will know the particulars of what you are trying to accomplish, and the best way to go about it.  They can then prepare customized documents on your behalf depending on the complexity and specifics of your exchange.

Next, the intermediary will be holding on to your money - the proceeds from the sale of your relinquished property.  Make sure that they are bonded, that they hold the money in a way and with a financial institution that you are comfortable with, and that they can always provide you with an accounting of your funds.  It is also a good idea to use someone who is reputable and has experience in such matters.

The qualified intermediary business is surprisingly an unregulated one, so anyone can set up shop and become an intermediary.  Make sure that you consult with yours, ask any questions to become comfortable, and that the intermediary is always there and able to respond to your needs and concerns, and can guide you through the entire transaction.  We work with many different QIs, and I'd be happy to refer you to one!

45 Day Deadline for Identifying Replacement Property

The time periods involved in 1031 exchanges are pretty strict.  There really is no room for leniency on things, unfortunately!  But, because these property exchanges allow you to save so much and have more capital available to use to invest, it is worth following the rules exactly so that you can get the benefits.

The 45 day rule is the first deadline you will run into on a typical exchange.  From the date that you close on the property that you are selling, you must identify very specifically up to 3 properties that you intend to buy. Either that, or you can identify as many properties as you like as long as the total ask price on all of them is not over 200% of what the sales price was on the one you just sold.  But most people simply identify 3 properties, and begin looking even before they close on the property that they are selling, so that they have a comfortable amount of time in case one goes pending, or is somehow not available.

You must then present this list of 3 properties within 45 days to your qualified intermediary, who is facilitating the transaction on your behalf. On the 45th day, this list is permanent, and you must then close on one of these properties by 180 days after the closing date of the sale of your old property.  I think it is best if you give the list a few days before the deadline, and then make sure that your intermediary got it.  If you email it to them, have them acknowledge it by email you back "Received", so that you have something for your records.