1031 Exchange--Can It Backfire?
I like the 1031 exchange, but have a concern. I'm a true bargain hunter in a rural area where the pickins can be slim. I'd rather not invest more than 100 miles away, and haven't so far. So what if I cannot buy—or even identify—a good replacement property in time? Does my $$ just revert to long term capital gains (plus I’m out the 1031 fees) then? Or would it be short term gains, taxed highly?
The “pool” properties—or whatever they’re called—that Starker and the others offer for parking one’s $$ don’t sound very exciting to me. I worry that a 1031 could end up leaving me less happy than had I just sold or L-O’d the property, paid the taxes, and kept looking for more real bargains. Has anyone had this experience with 1031 exchanges? Can they backfire?
If you plan to use a 1031 exchange to preserve your equity, locate a suitable replacement property first. Then enter an exchange. From the date of settlement on your relinquished property, you have 45 days to properly identify your replacement property.
You can take as long as you need to locate a suitable replacement property before you enter an exchange, but once you open the exchange window, the identification period closes after the 45th day.
If for some reason your exchange fails, all the profits from the sale of your relinquished property are taxed in the same manner they would have been taxed without the exchange.
You can also look at reverse 1031 exchange transaction where you can purchase your property first and then sell your existing property within 180 calendar days. They are more complex and more expensive, but can take the risk out of the 45 day identification rules. Here is a link to an article on them: http://comm.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=328
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