1031 Exchange Panic, looking for quick help

[Sharon Whipkey]

We want to identify 8 properties. 

1. If one property falls through is the whole exchange lost or just the one property's value gets subtracted from total value of property accumulated and liable for capital gains tax?

2.  If one property fails to close escrow, can I apply what would qualify as down payment to another property with an open escrow?

3. With the 200% rule, can I identify more properties, than I ultimately buy or once identified do I have to buy all identified properties.

Search extensively on line, all information vague.  Read BiggerPockets Brandon blog, doesn't address issue.  ]

Thanks for assistance

[Dave Foster]

@Sharon Whipkey, You can relax.  There's a lot of outs for you.  First of all there is no penalty for starting but not completing a 1031 exchange.  If you can't find good properties or if your properties all fall through then you let your exchange die and it's like it never happened.  The worst case is you pay tax on profit.  And no one ever went broke paying tax.  It just doesn't feel good!!!  So....

1. Use the 45 days and the days leading up to your sale) to get as far as you can in your replacement search. It's not uncommon at all for a client to have their new properties under contract even before their old property closes.  And of course you still have all of the 45 to keep looking.  If you're still within the 45 days you just find/name other properties.  

2. If you're past your 45 days you're stuck with the properties that are on your list.  But you don't have to close them all.  Remember that in order to defer all tax you must purchase at least as much as you sell and use all of the proceeds from the sale in your purchases.  

But you can purchase less than you sell and you can take cash out but you'll pay tax on the difference.  So it does depend on the numbers but if you wanted to close on 4 and only closed on three it's very possible that you would not have a taxable event - as long as the three you closed on were equal to or greater than the property you sold.  If the cumulative total was less, then you would pay tax only on the difference without impacting the rest of your exchange.

And you can use the proceeds in any fashion you want.  So if one property falls through you can apply extra cash to another.  

3. Your 45 day list is only a list of your potential replacements.  It does not dictate how many you purchase - only how many you identify as potentials.  It is very common to use the list to include a back up or two.  The nature of the 200% rule if you're actually wanting to name 8 potential replacement properties does limit you somewhat because you can't go over 200% of the value of what you sold.  But there is one more exception to that 200% rule (even though it's a tough one to meet) and that is that you can break the 200% rule as long as you purchase 95% of the value of the list.  Again, that's probably not one you want to rely on.  But it's a possibility.  

4. Back up properties and things like DSTs or TICs can be great comfort as back ups as well.  Again tougher to make work with the 200% rule and wanting to name 8 potentials but still an option.  

The 200% rule works good for selling an asset and buying several smaller assets.  But in your case it may be tough to keep 8 potentials under that limit.  So here's a couple options.

-Shop fast and get contracts and actually close on all the properties you want during the 45 day period.

-drop any iffy property off your list by day 45 so if needed you have a good chance of closing 95% of the value.

- purchase fewer replacements and concentrate the cash on very few.  Just close enough to cover your reinvestment target.  Then after the exchange is complete you can refinance the property/properties that you put a lot of cash down on and use the refi proceeds to purchase more properties without being hindered by the 1031 clock.