What Happens When a Taxpayer Does not Identify Property Within 45 Days?

taxpayer identification

What happens if we do a 1031 exchange and the taxpayer does not identify replacement property within the 45 days?

1031 Identification Periods

If the taxpayer actually closes on their property within the first 45 days, they don't have to identify. They are deemed to have identified because they closed on and receive their property during the 45 days. If, however, they want to keep hope alive after the 45th day, the only way to do that is to designate in writing replacement properties that may be received by the taxpayer within the remaining exchange period.

Failing to Identify

If you fail to identify or you revoke your identification in writing during the 45 day period, then the exchange ends at midnight of the 45th day and no other replacement properties may be received because there have been none identified. At this point you are now looking at having conducted a taxable sale (or partly taxable sale) and you'll receive back your unused exchange funds. However, you may have to give away a lot of your hard-earned equity in state and federal taxes.

Practice Tip:  You should always use the time before the relinquished property closing and the 45 days thereafter to vigorously search for like-kind properties that you can designate for your 1031 exchange; or lock-down a replacement property with a reverse exchange to increase your success rate in deferring the capital gains taxes.

  • 1031 Hotline: If you have questions about property identification periods in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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