Are you currently involved in 1031 Exchange that is in limbo due to the current economic shut down and the impossibility to Identify new replacement investments, let alone timely conduct due diligence. If so don t panic, you are not alone! Most 1031 Exchanges in California are at risk of failing because of the inability to find suitable reinvestment real estate.
Even under normal economic conditions 1031 Exchanges frequently fail because new investment real estate cannot be identified. That being stated, it probably does not make you feel any better about your particular situation. What should make you feel a bit better is the fact that there is an alternate solution known as an Installment Sale, of a 1031 account balance, which can save a failing 1031 exchange. Installment Sale transactions have been around since the beginning of the Internal Revenue Code but few tax professionals have experience in utilizing this strategy to acquire a 1031 account balance.
At this point we will examine why so many 1031 transactions end up failing. One of the leading reasons is due to the strict guidelines as set forth under section 1031 of the Internal Revenue Service tax code. It states that real estate sellers must identify a replacement property within forty-five (45) days after the close of escrow in order to defer the capital gains tax payment when conducting a profitable sale of property. This rule is based on one of the three following rules, which tend to be a bit confusing.
The Three (3) Property Rule: You can locate up to three (3) replacement properties and purchase any or all of them regardless of their total market value.
The 200% Rule: You can locate more than three (3) replacement properties and purchase any or all of them as long as the total value does not exceed 200% of the value of the property you are selling.
The 95% Rule: You can located more than three (3) replacement properties no matter how much their total value is if you purchase a minimum of 95% of the total value of the properties that you identify.
Following these rules can be a monumental task, and there are absolutely no exceptions. As you know, it can take a great deal of time to locate let alone view investment properties. You also need to perform your due diligence before becoming serious about the potential investment. Forty-five (45) days is simply not a long enough period of time to accomplish all of this in most cases. When it comes to a major investment, such as real estate, you certainly do not want to rush into anything. In addition to the forty-five (45) day rule, a plethora of failing 1031 exchanges are caused by the 180-day rule.
The 180-day rule states that the real estate investors must close on the replacement property within 180 days from the time he or she sells the original property. By the time you locate a property, view the property, perform your due diligence, negotiate, have all inspections performed, line up financing, and close on said property that 180 day time frame can be next to impossible.
If you need help saving a failing 1031 transaction in California, please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale structure to save failing 1031 exchange transactions. Our team of experts specializes in providing customized strategies that delay tax impact. TDS takes great pride in assisting sellers of appreciated assets in deferring the capital gains tax that greatly enhances the ability to grow your net worth. Our company was founded by a LLM tax attorney with over 20 years tax deferral experience and expertise with a singular focus on assuring sellers delay of taxation.