1031 Exchange Lowdown: How Late Is Too Late?

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How Late Is Too Late?

It is a fact that several property owners who are not well versed with 1031 exchange end up missing the opportunity to exchange. Nevertheless, there is a steady increase in the number of property owners who are now becoming more comfortable with tax-deferred exchanges.

Now, answer this question:

Q: How late in the process of selling my property is it still okay for me to enter into the exchange?

A: a) Just After Receipt of the Consideration

b) After leaving the Closing Table

c) Day of the Closing

d) When Creating The Sale Agreement

e) During The Offer

f) When I took the decision to sell the property

If your answer was a or b, then it is vital that you read this post; you are not aware of how 1031 works. If your answer was c or d, you're a little off the mark, but better off than the taxpayer who answered a or b. And those of you who answered e or f are the ones in the know.

Fact is, some taxpayers (erroneously) believe that they can do an exchange after selling their property, thereby missing out on the opportunity to exchange.

When you decide to sell: The best time to contact the intermediary is when you take the decision to sell. Once you decide to sell, contacting an intermediary helps you familiarize yourself with the technicalities of a 1031 exchange. This is also a good time to start looking for replacement property. This way, you avoid being squeezed for time during the 45 day identification period (which begins as soon as you sell your property).

After accepting the offer: After accepting an offer is still a good time to get in touch with the intermediary. This is a good time to make contact as it gives you as well as the intermediary time to discuss the exchange, and make arrangements for the offer check to be made payable to the intermediary. Also, you are in a position to incorporate 1031 compliant language into the sale agreement. You should now be actively looking at potential replacement properties.

Execution of purchase: It is reasonable to contact the intermediary prior to execution of the purchase and sale agreement. Needless to mention, you should now be actively looking at replacement properties if you want the exchange to go smoothly.

Day of the closing: It's the day of the closing, and you just heard of 1031 exchange, maybe due to a chance comment from the buyer. It's still not too late to enter into an exchange, but that's cutting it close! According to Thomas Moylan's article (Real Estate Journal) "1031 exchanges will remain hot in 2006 as well as some uninformed taxpayers,"

A competent and responsive intermediary will be able to work with the closing attorney to effectuate the same. Potential problems are deposit checks and uncooperative buyers or closing agents.

If you got to know about the benefits of 1031 after leaving the closing table, you may still have a chance – now a lot depends on other factors, and you have lesser control. Not a great situation to be in, but better than if you start thinking about the exchange after receipt of the consideration. Moylan states:

Once the final contingencies fall, and nothing remains to be accomplished except the ministerial act of recording the deed, the sales proceeds are vested in the seller (whether or not held by the seller or the closing agent) and it is too late to enter into an exchange.

So don't wait till the last moment; educate yourself about 1031 now to avoid missing out on a tax saving opportunity.

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July 4, 2006 in Information | Permalink