When it comes to the 1031 exchange, what is the 45 day ID rule and why is it so important? Measured from when the relinquished property closes, the Exchangor has 45 DAYS to nominate (identify) potential replacement properties and 180 days to acquire the replacement property. The exchange is completed in 180 days, not 45 days plus 180 days.
If this does not happen on time, there can be consequences for you and your Exchange. Sit down with Tina Colson and Jenni Anderson of Equity Advantage as they cover all you need to know about this 45 day ID rule!
Tina Colson: Hi. Welcome today. I am Tina Colson, with Equity Advantage and IRA Advantage, and we also have Jenni Anderson with us in our office. And hey, Jenni, I understand you have some questions.
Jenni Anderson: Alright, Tina. So I’ve been doing my fair share of Googling and I’m looking into these 1031 exchanges, everything is throwing two numbers at me and the first seems fairly important, but I don’t quite understand why.
Tina Colson: Okay.
Jenni Anderson: Can you tell me more about what this 45 day window is? And why is it so important?
Tina Colson: Absolutely. So, and great question. So with your exchange, you’ve got a total of 180 days, which starts at the date of your relinquished property closing. The first 45 of that 180 days is that identification period. So that identification period is crucial because one, what happens if you don’t find any property to identify that you want to purchase in the exchange during that period, don’t identify anything. We’re going to send your money back to you. We’ll cancel your exchange on day 45, we’ll send your money back to you on day 46. Keep in mind that money is going to be taxable as a regular sale. So let’s say a second scenario, you identify property and you can identify as many as you would like. So if you identify property and that’s property that you definitely want to purchase in the exchange, Don’t go throwing your neighbor’s property address on there, knowing that you can’t purchase it in an exchange because it’s not going to do you any good. Okay. So identify your property, if it’s within the 45 days and something falls through, you can’t get it under contract, then you can re-up, you can put another property in the mix, again, as long as we’re in the 45 days, it’s completely flexible.
Tina Colson: So what happens if you identify property, and let’s say you only identified one property and you had it under contract, now the inspection is done and it’s more problems than you want to deal with, so you don’t want to buy that property, but again, you’ve only had the one identified within the 45 days, we’re on day 60, falls through. Now, your money is going to be tied up through the end of the exchange period. We cannot release it until day 181. So for a lot of folks, that’s a big deal. Again, that money is going to be taxable to you and depending on when you sold your relinquished property versus when you’re going to receive the funds back, if you’re straddling tax years, now you’ve got two different events and you’re going to be charged the gain in the tax year in which you receive the money. So that is a big deal. As far as what you can identify, how many properties again that you can identify, that varies, and you’ve got three independent rules with that. The first one, if you only plan on purchasing one to three properties, stick with the first independent rule, which is a three-property rule, it gives you the most flexibility, you simply need to write in the address of the property that you wish to purchase and that’s it. Sign and date the form and submit it to us by day 45.
Tina Colson: The second independent rule is called the 200% Rule, so what this means is if you identify four or more properties, you need to add up the accumulative value of everything that you’ve identified, you don’t want it to exceed 200% of what you just sold. Do you sell a million dollar property, don’t exceed two million dollars in your identification, otherwise, it’s going to throw you into the third category, which is a tough one, and that’s the 95% rule. So as long as you are under 200%, you have the flexibility to purchase one or more properties that are ID’d, if you get into the third rule, the 95% rule by exceeding the 200% of what you just sold, now you’ve got to close on 95% of everything you’ve identified or it’s going to blow your whole exchange.
Jenni Anderson: Wow.
Tina Colson: That’s a tough one. So most people avoid the 95% rule and they will stick with rule number one, which is three property rule or the 200% rule.
Jenni Anderson: Wow. Okay, that was super informative. I feel like I’ve just got a crash course spark notes 45 days education.
Tina Colson: Great.
Jenni Anderson: My key takeaways, correct me where I’m wrong, 45 days, I can change my mind, I can shop, drop, swap. That’s okay?
Tina Colson: Absolutely.
Jenni Anderson: Day 46. It’s written in stone.
Tina Colson: Yes.
Jenni Anderson: So I have to follow through on what I want to purchase.
Tina Colson: Yes.
Jenni Anderson: And then if I don’t, if that does fall out, my money is tied up till day 180, then I’m facing the tax consequences. So that seems highly important, this 45 days, it doesn’t seem like something to play around with.
Tina Colson: Absolutely, and here’s something else that’s really important on our end. So when our clients identify, again, you could identify property, all of it could fall through and we may not close on anything. But once you get something under contract and we’re ready to close, please make sure that you’re contacting us, make sure that we’ve got the property address, the price of the property that you’re purchasing as well as the escrow officer or closing attorney contact information, because we need to draw our exchange documents up prior to you closing on that new replacement property. So that’s another piece that gets missed often, is somebody may identify, but we’re unaware that they’re actually going to close on it, so following up with that information is crucial again.
Jenni Anderson: Wouldn’t it be great if we could just read each other’s mind, Right?
Jenni Anderson: I’ll just send you a text, “Tina, I found what I want to purchase”.
Tina Colson: Yes, yes. So please contact us, that’s what we’re looking for, is that communication piece, and again, we all want to be on the same page and we need to work really closely with your closing agent on the other side, so very important.
1031 exchanges are complex, using an exchange accommodator like Equity Advantage puts a professional in your corner who knows all the rules. It just takes a phone call to get started, 503-635-1031.
