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REPLACEMENT PROPERTIES IN 1031 EXCHANGES


One of the biggest obstacles in completing a successful 1031 exchange is the 45 day identification period. If a property is sold and an exchange property/properties can not be identified within 45 days of the original property’s closing, the exchange will not work and the sale will become a taxable event. Another negative is that because of the concern of not being able to identify an appropriate property during the identification period, a prospective client will decide against selling the property altogether until a later date.

This obstacle can be successfully overcome in the following way. There are properties that can be used to “park” the exchange. These properties can be bought in basically $100,000 units. These properties pay approximately 7% after tax cash flow to the client and when these properties are sold, the client receives 85% of the appreciation of those properties. The broker receives a 3% real estate commission.
 

At the closing of the original property, these properties can be identified and purchased and thus, the exchange is complete. Now, the client has all the time needed to find the appropriate replacement property and if it takes 2 years to find the property, that’s fine.