What if I'm having a hard time finding replacement property?
Can I still do a 1031 Exchange?
The short answer is yes, but like any good counsel, we also commend you proceed with caution. We hope that the following considerations will encourage you to do your homework before getting into an exchange.
You may be thinking “no problem, I have 180 days to close on a replacement property!” That should be plenty of time . . . but remember that you only have 45 days to identify which replacement property you are going to purchase.
To make the situation worse, the IRS limits the amount of properties you can identify. Most people choose to identify 3 properties. However, many times all of those contracts fall through. Or, alternatively, the Exchanger gets stuck with one of the identified properties and ends up paying far more than market value for the property - only because they want to complete the exchange!
Here are some things to keep in mind if you are having a hard time finding replacement property before you start your exchange:
Ask for an Option Contract.
If you already have a buyer for your relinquished property, ask if they would be willing to sign an option contract for the property. This will allow you more time to do a 1031 exchange. An option contract keeps the buyer locked in, but does not force you to sell. You may be able to push the sale out a few months – which can buy you more time to find a replacement property.
Consider a Reverse Exchange.
Most people are scared of the complications of a reverse exchange. But it can be a powerful tool for savvy real estate investors. The reverse exchange allows you to buy your replacement property first, and then sell your relinquished property within the 180-day period.
Pros: Property identification is easier because you only have to identify which property you will sell. This reverse exchange tactic works well in a seller’s market and it is hard to find a good property.
Cons: The Exchanger must be able to secure financing on the replacement property without using the cash from the relinquished property. Additionally, the cost is usually more significant – there may be additional legal fees and a slightly higher exchange fee. However, if you can overcome these obstacles, and if the value of the real estate outweighs the additional cost, it is a wonderful tool to use.
To discuss an option contract or reverse exchange, call our team at 214.295.6281.