August 12, 2021
Peter
Peter Marzo
For investors who are considering or in the process of using a 1031 exchange, there can be many challenges associated with successfully closing.  A few of these challenges today involve:
 
·         Ability to source, identify, analyze, inspect and value replacement properties
·         Ability to secure financing
·         Ability to secure an appraisal at a sufficient value
·         Ability to successfully 1031 exchange within the 45-day identification & 180-day closing timelines
·         Overpaying in a competitive market
·         Seller gets cold feet

In this article we are going to discuss the basics of 1031 exchange timelines and ways to increase the chances of a successful exchange including:

            ·         What are the 45-day & 180-day Timelines?
            ·         What is 1031 Exchange Backup?
            ·         Using a Delaware Statutory Trust (DST) as 1031 Exchange Backup


What are the 45 & 180-day Timelines?
Within the IRC 1031 tax code, there are two major timelines the IRS implemented which allows an investor to exchange a “like-kind” property for another. 

45-Day Identification Period
Upon selling the relinquished property, a 1031 investor has 45 calendar days to identify potential replacement properties to purchase.  After the 45-day ID period, these properties must be closed upon to complete the exchange, or the exchange will fail.  All identifications are completed with a Qualified Intermediary (QI).

180-Day Closing Period
Upon selling the relinquished property, a 1031 investor has 180 calendar days from the date of sale to close the replacement properties previously identified.  Replacement properties must be received and completed no later than the earlier of; 180-days after transfer of the exchanged property, or the due date of the income tax return (including extensions for tax year in which the relinquished property was transferred). 

What is 1031 Exchange Backup?
1031 Exchange “backup” is a term used to ensure an exchanger has a property or several properties to fall back on in the event a complication occurs on a property previously Identified.  Once an investor is past the 45-day ID period, there is no way to alter the Identified properties. 


For example, an exchanger uses The Three Property Rule and IDs all 3 properties allowed.  It is now day 46 and his first property identified was outbid by another buyer.  The exchanger now has 2 additional backup properties as insurance in the event he failed to close on the first property.

Using a Delaware Statutory Trust (DST) as 1031 Exchange Backup
There are several features the Delaware Statutory Trust or DST can provide investors that a traditional property exchange cannot.  These main features include:

  • Quick Close: No need to source and conduct due diligence on replacement properties. The DST property is already pre-vetted and closed.
  • Pre-Financed: No need to secure financing. The DST property is pre-financed and loans are non-recourse to investors.
  • Pre-Leased: No need to secure new or existing tenants since the leasing responsibility is held by best-in-class property management already in place.

For a full list of DST benefits, consider reading our article "10 Advantages of Owning a Delaware Statutory Trust (DST)".

Conclusion
The IRS has placed strict timelines for 1031 exchangers to abide by.  These timelines include 45-day identification & 180-day closing periods.  Meeting these deadlines can be extremely difficult and can sometimes lead to a failed exchanged if not handled correctly. 

It is strongly recommended to identify more than one replacement property as backup in the event problems arise with the first target acquisition property.  By identifying a second or third replacement property, you significantly increase your ability to successfully 1031 exchange.

A Delaware Statutory Trust (DST) can be one of the most powerful tools used today to successfully complete an exchange.  A DST can offer the flexibility of closing quickly and alleviate the burden of securing financing from lenders.

Since most DSTs are fully stabilized, investors can rely on best-in-class property management to handle all leasing efforts for simple, turnkey ownership.  By identifying a DST property as a backup, an investor can gain the confidence to successfully close his exchange by eliminating most issues associated with a traditional exchange.

Get the backup you need with Exchange-X, the leading DST investment platform that provides investors access to dozens of institutional grade replacement properties to choose from. 

For more information, schedule a consultation with one of our experts or call 888-495-7355 today.
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