Can I Revoke or Revise My 1031 Exchange Property Identification?

Many taxpayers considering a 1031 exchange want to know if they can change their property identification at any point throughout the exchange process. That’s our topic for today’s article.

The First 45 Days

During the first 45 days after the closing of your relinquished property (the Identification Period), you are free to revoke or change your 1031 Replacement Property Identification provided that it is done in writing, signed by the taxpayer and it is sent to the qualified intermediary (or other person involved in the exchange that is not disqualified) that you identified to previously.  If you do revise your Identification to add new properties to your list (to remove and replace other previously listed properties), then you may want to make it clear that your subsequent Identification supersedes and replaces any prior designations by writing that on the last Identification. Otherwise, it may be unclear if your subsequent Identification is intended to add more properties (potentially pushing you over the Three-Property Rule or 200% Rule).

After Day 45

After the 45th day of the exchange, the only properties that will be considered like-kind (once the 45th day has elapsed and the Identification Period is over) are those properties that were properly designated. You are not allowed to change your 1031 Replacement Property Identification after the 45th day, so if a better property comes along that you would prefer to purchase, you are S-O-L (Statutorily Out of Luck).

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How to Take Title to a 1031 Replacement Property with Your Spouse

Many taxpayers have questions about how to take title to their 1031 exchange replacement property with their spouse.

Taking Title with a Spouse

Let’s consider an example where taxpayer “A” wants to bring their spouse (taxpayer “B”) into the replacement property as a co-owner. If taxpayer “A”  alone owned the relinquished property that may create an inconsistency for tax purposes. If taxpayer “A” alone owned the relinquished property and taxpayer “A” and their spouse (taxpayer “B”) want to buy the replacement property there could be a dilution of taxpayer “A” equity so that they are deemed to only have received 50% of the replacement property and only used 50% of their exchange funds for their purchase…the rest could be treated as taxable boot given to taxpayer “B”. Questions to ask in this situation are:

• Was the relinquished property owned in a community property state and was the property considered to be owned by the two jointly?

• Are they in a non-community property state in which only taxpayer A is considered the sole owner?

I advise clients to take title to the replacement property without their non-titled spouse so they complete the exchange (exactly as they owned the relinquished property) and everything looks matching. Then at some point in the future they can make a new recording that includes their spouse on the title. In the interim they can provide for that titling inconsistency in their will or estate planning.  Sometimes I have to provide marriage counseling in the process, because the non-titled spouse may feel uneasy about being kept off title for the new replacement property.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Keeping Accounts Separate in a 1031 Exchange

If you think about it, the seller of a relinquished property in a 1031 exchange really should be holding their security deposits in a separate escrow account. Upon closing, those security deposits should be transferred to the buyer. But a lot of time property owners don’t keep separate accounts and instead want to raid the proceeds from the sale of the relinquished property to pay the security deposits over to the buyer.

Remember we’re supposed to move all equity from the relinquished property to the replacement property, and raiding the kitty to pay the security deposits to the buyer could be a taxable event. The same goes for rent proration. If the seller has collected rents for the month, they should be taking the money out of their operating account for the portion of the month that the buyer will own the property.

Oftentimes it’s a good idea to work as much of these details out with the seller and the Qualified Intermediary (“QI”) and then have the seller’s CPA or accountant double-check the debits and reductions for transactional expense before closing.  The seller’s CPA or accountant will know their tax situation better than anyone and can weigh in on what should and should not appear on the closing statement.  That way if there is ever a question about it at tax time, their CPA or accountant will be aware of the details from closing.

Many people have questions about what closing costs are appropriate and having a good QI as a resource is really important.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Is it Too Late to Start a Like-Kind Exchange if your Closing is Tomorrow?

Is it too late to do a 1031 exchange if my closing is tomorrow? Sometimes we get calls from people that are at the closing table doing a sit-down closing and then it occurs to them that they should do a 1031 exchange and they say "stop the presses everyone we've got to put this on hold so I can call my qualified intermediary!"

Jumping into Action

When that happens, we quickly prepare the 1031 documents and email them to the closing table so that we can have the documents signed concurrent with the transaction.

Restrictions

We can't, however, paper a 1031 exchange on a transaction that has already funded and closed. So can we stop the presses and put the closing on hold to get the 1031 documents put in place? Yes we can. Is that very irregular? Does it cause a lot of consternation and difficulty for the other parties involved? It is inconvenient to put everything on hold but that doesn't really matter when your taxes are on the line and you’ve got to figure out a way to defer those taxes.

Do we get calls at the last minute? Yes. but it's much better if you can have the forethought to get your 1031 exchange arranged, set up well in advance of closing, and even pre-sign your 1031 documents well before you transfer the benefits and burdens of ownership to your buyer.

A Word of Warning

Once the benefits and burdens of ownership have shifted; and the conveyance has taken place, and the buyer’s money has been paid to the title company, it is probably too late. For that reason, it's always a good idea to get out ahead as much as possible and give yourself plenty of time to complete your 1031 exchange so you're not scrambling at the zero hour.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Remember These Critical Deadlines in a Like-Kind Exchange

There are two extremely important deadlines when you're doing a deferred exchange. The first is the 45-day identification period, which commences the day after the closing of the relinquished property.

When Does the Closing of the Relinquished Property Occur?

It’s when the benefits and burdens of ownership shift. When that deed crosses over to the buyer and the consideration or sales proceeds come across the table to the seller, that's when the benefits and burdens of ownership shift. That’s day zero for computing a 45-day identification period.

By midnight of the 45th day you need to have sent your identification in writing to the intermediary or to another party to the transaction that's not a disqualified person. Typically people send the identification to the intermediary but in theory you could send it to other people such as the seller of the replacement property unless they're related to you or otherwise disqualified.

180 Day Exchange Period

The other important deadline is the 180-day exchange period. You only have 180 days to receive your replacement property and again that clock runs concurrently from the day after closing of the relinquished property. There's a big curve ball though with regard to the hundred and eighty day deadline because the IRS is impatient. They don't want to wait until your subsequent tax return to see how this story unfolds. They say we’ll give you a hundred and eighty days to complete your exchange, but if the due date for the filing of your federal income tax return pops up within that hundred and eighty days, they shorten down the exchange period to the due date of the filing of your tax return.

Well if you start your exchange day in December and you have to file your tax return on April 15th you're not going to get your full 180 days. There's an easy fix though - you simply ask for an extension on your federal filing deadline and move your filing deadline out to October 15th. Now that extends the tax filing period but does not lengthen your exchange period. You still only have a maximum of 180 days. During that timeframe you've got to receive the benefits and burdens and ownership of your new replacement property. 

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved