I was talking with a client this morning who is two weeks away from the 45th day of his exchange. After selling his investment house in Connecticut for just over $800,000 with do debt he thought it was going to be easy to find a replacement in Portsmouth, NH.
He had been looking at real estate for over a year in the area, and was excited to move his investment house from Connecticut to the seacoast of New Hampshire.
Because the real estate markets are warming up all over New England, his Connecticut house sold three days after it was up on the MLS, for cash, and above the asking price. The caveat, the new owners wanted to close in 14 days, no inspections.
Good news, you say? Well it is certainly good news to get a cash buyer, but, oops, that just shortened his identification period to the 2 weeks, plus the 45 days.
Frantically he began his search for his replacement property. The strategy was to buy an investment property he could rent out, and one that he could rent out and convert to his second home in a couple of years. He was willing to add up to $200,000 in additional cash to the deal giving him almost $1M of buying power.
His property closed a month ago in Connecticut, began his ID Period and beginning what I call “The 45 Day Shuffle”.
You would think it would be a walk in the park to spend a $1M on a couple of very nice properties. Well, as my client is finding out, in a hot real estate market, it just is not that easy.
Even with a million bucks in hand, he has had a hard time finding just what he wants. He’s made offers on a couple of properties, to be outbid the next day. He changed his strategy and started putting in offers at asking price, cash, and close immediately, and still lost two properties.
As the clock ticks, the 45 Day Shuffle is starting to add a level of stress to this exchange that he was not anticipating. He is now starting to ask questions about the ID Rules (that of course we have already covered) in anticipation of coming up against his deadline, thinking that the rules might have changed this past week.
Up until midnight of the 45th day of an exchange, every property in the 50 US states can be identified. The identified address MUST be unambiguous, so you can’t identify “A Condo in Jacksonville, FL” or even one in “Shady Acres Condominiums”, you must identify the EXACT address you will be purchasing.
On the 46th day your list CANNOT be changed or modified for any reason except for a Presidentially declared emergency in the location of your relinquished property or the area in which you are seeking replacement properties.
It does not matter that the property was discovered to have a gas tank from 1968 buried beneath it, or if it burns to the ground, your list is your list.
After speaking with my client today, there are three properties that he is very interested in, and he now is willing to be very aggressive in his offers to try to get to contract on them. His basis in his Connecticut house was nearly $0, so he is motivated.
But his experience should be a lesson to those who are embarking on an exchange. The process goes much simpler if you know what you want before you sell what you have. This can be tough sometimes, but in a pinch you can even consider a Reverse Exchange to buy what you want FIRST. These are more complicated, but as the real estate markets heat up around the country sometimes can make a huge difference in the success of an exchange.
Part of the stress of the 45 Day Shuffle is that Section 1031 is such a powerful tool in assisting you to use what you would have paid in taxes, to add to your real estate portfolio. However, we never like to see clients exchange just to avoid the tax, so good planning is necessary to avoid the stress of the “Shuffle”.
Edmund & Wheeler, Inc. has been assisting clients with their exchange strategies for almost 35 years. We like to get involved early, and can assist in helping you to understand and use the code to your advantage.