Common 1031 Pitfalls
It’s almost turkey time. And as we gear up for a deluge of comfort food, family and friend reunions and 5K turkey trots, don’t feign food coma if you get caught in these 1031 pitfalls. Count your blessings and avoid these 5 common 1031 Exchange mistakes.
1. Forgetting to set up your exchange before closing
No presidential turkey pardons on this one. You must set up your exchange with IPX1031 (your Qualified Intermediary) before you close on property you are selling (or buying if a Reverse 1031 Exchange). The 1031 rules set out in the Tax Code are very strict and there is not a workaround for this one. Reach out to IPX1031 before your transaction closes. The more lead time the better.
2. Looking for a full tax deferral but not buying equal or greater than
Most exchangers want to fully defer all taxes. But if you do not purchase new property with a value equal to or greater than the property that is being sold, full deferral will not happen. However, if you purchase a property of lesser value, a significant amount of tax may still be deferred, resulting in a partial exchange.
3. Not identifying on time
From the time your Relinquished Property closes, you have 45 calendar days to identify your Replacement Property. If you do not identify a property until after the 45 days, that property will not qualify for 1031 tax deferral treatment. Timing rules are strict and cannot be extended even if the 45th day falls on a Saturday, Sunday or legal holiday. Keep in mind that you can change your identification at any time prior to the expiration of the identification period. Just make sure this happens before day 45.
Helpful link: Deadlines and Identification Requirements
Video link: 1031 Exchange Identification Requirements
4. Waiting to look for Replacement Property
1031 deadlines can come very quickly. In competitive markets, finding, identifying (45 days) and then closing (180 days) Replacement Property may be a challenge. All must happen within a total of 180 calendar days (the 45 and 180 day periods are not separate time periods). Do not wait to start looking for your Replacement Property. Start soon – even before your Relinquished Property closes – so you have a head start in the identification process.
Video link: 1031 Exchange Time Constraints
5. Making sure your exchange funds are safe
1031 Qualified Intermediaries are not regulated by the Federal government or most State governments. This means that there are no uniform regulations or laws concerning how your funds are deposited, invested, or secured by Qualified Intermediaries (QIs). QIs are not uniformly required to provide insurance or other protections for your exchange funds. It is up to the taxpayer to determine the competency and safety of their chosen QI. Therefore, if your funds are lost or misappropriated by a QI that doesn’t provide adequate protections, the loss is borne by you.