1031 Identification process & strategy

[Eugene Cheng]

I am planning to sell my SFH rental to exchange for MFH. However I have not yet settled on the exact type and location of the replacement properties. I have been looking from 3-4plx in over CA bay-area and Sacramentor, to commercial ones in Texas. Do I have to buy the exact property that I identified in the 45d window?

Some website says IRS mentions the final replacement property needs to be "substantially the same". But that's really vague -- is a 4plx 30 miles away from the identified 3plx good?

I am curious how people do: for example, I might identify 3 properties (or a few more w/ 200% rule) after day 20. but lets say at day 44 a different property comes up that I really like which is not quite "substantially the same" of the identified ones. Can I change?

What's the general strategy to allow the biggest flexibility?

 Also I tried to find the IRS code 1031 section original text but couldn't. Anyone has a good pointer. All the information I have are from various website but I like to get to the original source.

[Dave Foster]

@Eugene Cheng,  Like kind is going to be any kind of investment real estate for any type of investment real estate and any place in the country.   And a mix and match of different types/sectors/locations of properties on your 45 day list doesn't matter either as long as they are real estate that you intend to hold for productive use. What you're looking for is perfectly fine.  

The key for you is that it needs to be on your 45 day list of course.  But that 45 day list is fluid and can be changed at will until midnight on the 45th day after closing.  So it really has no relevance until that point.  So don't worry about the list at this point.  Get busy shopping.

Although it sounds like a reverse exchange is out of the budget for you there are some other possibilities to mitigate that 45 day period.

1. As I mentioned - get busy shopping now.  You're learning markets and that's a great thing.  This will help you to recognize a good  property more quickly when it pops up after your sale and you'll feel more comfortable pulling the trigger.

2. Use contingencies if you can.  Make an offer to purchase contingent on the sale of your old property.  Or sell the old property with a fluid closing date contingent on you finding a suitable purchase. 

3. Try to close on your first choice during the 45 day period.  This will still give you time in case something happens and that first choice is gone.

4. You can actually go into contract for your new property before your old property closes.  The statutory requirement is that you close your sale before you take title to the new property.  This is why a reverse exchange exists.  But you can, without the extra effort and cost of a reverse, lock a property down under contract and just make sure that the dates line up so you close the sale followed by the purchase.

And yes, you can close on your replacement during the 45 day identification period.  If you do then by default your 45 day list becomes the property you purchased.  That's not a bad scenario to mitigate risk and to get the cash flow pump working again as quickly as possible.