How To Find The Right Replacement Properties During The 45-Day ID Period?

How To Find The Right Replacement Properties During The 45-Day ID Period?

By | June 27th, 2022|Blog|0 Comments

If you are a keen investor in the real estate realm, we bet you had several deals fall into your hands. But, when it comes to a 1031 exchange and finding the replacement properties within a strict time crunch, things can get complicated. In fact, there’s no denying that to complete the 1031 exchange and defer your capital gains taxes, you must follow a strict 1031 exchange timeline

Factually, a 1031 exchange is a simple swap of a relinquished property with a like-kind investment property. But, what complicates the matter is finding the right replacement property within 45 days of selling your relinquished property and closing the deal on them within 135 days of completion of the 45-day ID period.

But, this article might be of help. If you are in your 45-day ID period, read on to discover the different ways that might help you find the right replacement properties fast.

The Three-Property Rule

According to the IRC code, a 1031 exchange occurs when you sell your relinquished property and invest the entire proceeds in like-kind investment properties, thus deferring the capital gains taxes.

Moreover, if you are within your 45-day ID period, you must search and select up to three replacement properties and give the list of your chosen properties to your QI. Once chosen, you can invest in either of them. In fact, you can invest in two properties as well, given you are left with a boot amount.

However, while selecting your replacement properties, it is often recommended to give yourself the benefit of the doubt. In simpler terms, you must list a backup option in case your first preference falls through.

The 200% Of The Fair Market Identification Rule

If you are planning to invest in multiple properties and expand your options beyond the three property rule, you can follow the 200% of the fair market identification rule. The 200% rule implies that you can identify unlimited properties as long as the fair aggregated market value of all those properties combined does not exceed 200% of the sale price of the relinquished property.

Following this rule can be a great option, especially if you are looking to expand your options and invest in multiple properties. Moreover, this rule would also allow you to follow the 1031 exchange timeline rules by helping you find the right replacement properties within 45 days.

The 95% Exception Rule

Like the 200% rule, this rule too allows you to invest in multiple properties and expand your horizon. However, in this case, you would have to acquire at least 95% of the fair market value of all the properties.

While this can get a bit challenging, it will allow you to find some stunning replacement properties with assured returns.

Is DST The Right Option?

When listing your replacement properties, it is often recommended to list at least one DST property so you can have a backup in case the first two options fail to succeed. Moreover, DSTs are actually great investment prospects, given that they allow you to become co-owners of institutional-grade properties with absolutely no landlord responsibilities.

“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”