quote:

Originally posted by JALLEN:
In a 1031 deferred exchange, the tax payer has a certain number of days within which to designate the replacement property, and a certain time period within which to close and complete the acquisition of the replacement property. If the deadline is missed, the exchange is blown, losing the tax deferment. That puts enormous pressure on all participants in the escrow, and an opportunity for strategic footdragging if need be.

I appreciate JALLEN's experience and cautionary tale of how bad things can get, but let's add some numbers and positive mitigation plans for some perspective: From the time you sell your piece of property you have 45 days to identify the property you want to buy, and up to 3 properties can be identified. This is known as the Identification Period. Running concurrently is a 180-day deadline from the original property sale to the closing of the next property.

Now you can be stupid and wait until you sell your property to begin the search for replacement property. If you do that, then yes, you're going to feel that enormous pressure to find something in 45 days and close on it within 180 days. Or you can do your real estate research far in advance of the sale and easily identify 3 properties that won't leave you with buyer's remorse. In my case, I started looking at replacement properties over a year before I put my place on the market. The day we stuck the For Sale sign in the pasture I had three properties in descending order to choose from.

So what do you really lose if your exchange purchase doesn't go through? For me it would have been $1800 for the non-refundable Exchange Fee. But I was willing to bet that against the Capital Gains bill I would have received anyway had I not even tried to use the Exchange process. The potential upside of a successful Exchange was far more desirable to me than the sure downside of giving Uncle Sam 15% of my profits. That would have left me with even less cash to make another purchase.

Without a doubt there are some pitfalls to a 1031 Exchange, but through planning and due diligence you can mitigate many of those. Or you can just willingly give the IRS 15% on top of all the other fees a seller must pay.