Rule No 2 Forty FiveDay Identification Period

Starting the day you close the sale of your old property, you have exactly forty-five calendar days to come up with a list of properties you might want to buy.

On this list you may place up to three properties with no limitation. For example, if you sold your old property for $100,000, you could list three properties for $10 million each, for a total of $30 million. While this may seem like a strange example, I actually had a client with this exact scenario several years ago. He was in the market to buy a shopping center and was actually looking at three different properties. Before he could complete his purchase, he got a call from a tenant who wanted to buy a small condo that he owned. Since my client was going to buy one of the shopping centers anyway, he threw the sale of the condo into the mix and did a 1031 Exchange so he wouldn't have to pay tax on it. It was just lucky timing for him, and he was able to sell the condo without a tax liability, even though it was insignificant to the overall transaction.

You may put more than three properties on your list, but if your list has more than three properties the IRS will subject you to an additional set of rules that says, in effect, that the combined purchase price of everything on your list may not exceed twice the selling price of your old property. This is called the 200 percent rule. Going back to my example above (where you sold your old property for $100,000), if you had put four or more properties on your list, the combined purchase price of everything on your list would be limited to twice ($200,000 in my example) the selling price of the old property. In other words, you could list three properties for $30 million or more, but once your list exceeded three properties your whole list is limited to $200,000 (twice the selling price). My advice: Keep your list to three properties or less.

TIP Keep it simple—keep your forty-five-day list to three properties or less.

As I said, the forty-five days are calendar days, starting the day you close the sale. This means that if the forty-fifth day is a Saturday, a Sunday, or a holiday, that is the date that your list must be completed, and you don't get until the following business day to complete your list. And no, you cannot get an extension of this time limit.

When you make your list, you have to identify the properties clearly enough that if you get audited the IRS agent could look at your list and go directly to the property. In other words you have to state: "123 Main Street, Phoenix, Arizona." You cannot say "a three-bedroom, two-bath house on Main Street in Phoenix."

You then give your list to a person called a qualified intermediary, which I'll discuss in rule number four.

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