The most challenging task of the entire 1031 exchange process is identifying a replacement property within the first 45 days. If you are new to the world of 1031 exchanges, you should know that the first thing that the IRS requires you to do, post the sale of your relinquished property, is to identify one or more replacement properties within 45 days. This time frame is known as the Identification Period. In case you fail to identify a replacement property before the deadline, your 1031 exchange will no longer be valid.
What challenges investors face during Identification?
Property identification requires a lot of effort and time. You may need to visit several real estate firms or agents to close your Identification period. Plus, the availability of the property is also a concern. Say, you identified a property for your 1031 exchange. However, the property owner asks you to wait for a year for possession. If you do so, you won’t be able to complete your 1031 exchange. Not to mention, as per 1031 exchange rules, you must complete your 1031 exchange within 180 days, which includes the identification period. These are the most fundamental reasons why investors fail to identify replacement properties during their identification period.
Don’t wander aimlessly. Look out for options.
Time plays a crucial role in 1031 exchanges. You must save as much time as you could. Look out for different buying options. Keep one or two properties on standby, so that, if anything goes wrong, you have an alternative. Another way to deal with identification problems is to invest in DSTs. A Delaware Statutory Trust or DST is a private governing body that owns, manages, and sells investment-grade properties. DST investment qualifies for 1031 exchanges, and when you invest in a DST, it is considered as an investment in a real estate. This eliminates the trouble of getting out on the streets and hovering around. Instead, you can easily compare different DST investments and choose the one that fits in your budget. This is the best way to deal with Identification fright.