Re: Sorry…another 1031 question - Posted by Dave T
Posted by Dave T on August 19, 2005 at 21:43:07:
I think you already have a basic overview of the delayed exchange.
When you sell your relinquished property ALL of your net proceeds from the sale must be reinvested into your replacement property. Most likely that amount will be greater than $373K because you have been paying down your mortgage…right? Failure to reinvest all of your net sale proceeds will make that “shortfall” a taxable capital gain.
From the date of settlement on your relinquished property, you have a 45 day window to formally identify the replacement properties that you will acquire to complete the exchange. You can identify up to three properties without any restrictions, but you are permitted to identify more if you need to. Failure to identify your potential replacement property before the 45 day identification period expires, nullifies the exchange and the sale of your relinquished property becomes a taxable event.
If you identify more than three properties, then the total value of all properties identified can not exceed 200% of the value of your relinquished property, or $1.8MM in your case. During the 45 day identification period, you can change your mind as often as you wish, substituting new properties to replace others than were previously identified. At the end of the 45th day, you are locked in to those properties on your most recent list. To complete the exchange, you must purchase one or more properties from your list of identified properties. Failure to purchase your replacement property(ies) from the list of identified properties will nullify the exchange and the sale of your relinquished property becomes a taxable event. Failure to purchase any replacement property before the 180 day exchange window closes or before you file your tax return for the year of the relinquished property settlement, will also nullify the exchange.
There is nothing to stop you from locating potential replacement properties now, before you go to settlement on your relinquished property. You can even get the replacement properties under contract now, with a settlement date after the sale of your relinquished property. Last year, I put two preconstruction properties under contract that will be delivered in November of this year. I have just identified these properties as my replacement properties for the relinquished property I am selling next month.
When you complete settlement on your relinquished property, you then have 180 days to complete the acquisitiion of your replacement property, or until you file your income tax return for the year, whichever occurs first.
A qualified intermediary is required in a delayed exchange. I use the trust department of my bank.