THE 45-DAY IDENTIFICATION WINDOW
When starting the 1031 exchange process, it’s critical for exchangors to know all of the factors that can influence the process. This includes the 45-day identification window.
The identification process stipulated in the Internal Revenue Code §1031 is very particular and can be an area that can trip up those doing a 1031 exchange. Regulations state that the window to identify is strictly 45 calendar days––not business days. It includes weekends. It includes holidays. It includes every day. Knowing this detail, we add our own experience to this knowledge in hopes to help exchangors can enter their ID period and the bustling holiday season prepared.
Many exchangers assume 45 days is long enough to properly identify replacement property options, work with real estate professionals to submit acceptable offers, and go under contract with the seller with a clear path to close prior to the 180th day. The 45-day identification window slips away far too often, leaving the investor (taxpayer) left with only dreams of finding the perfect replacement property and an unexpected tax liability that represents years of earned rental income and sacrifice.
Tis’ the season for holiday parties, work events, “Friendsgiving”, gathering with family, and any other type of celebration that we try to squeeze in between now and the first of the year. As we approach the holiday season, be mindful of just how complicated, and complex our seasonally affected day-to-day lives are right now. It is important to realize that calendar holidays in the months of November through January may also eliminate the ease of communication with businesses as they are closed during extended periods of time. Don’t let the fun of the holiday season overshadow your identification period and create an expensive problem as you enter the new year.
To help facilitate a successful identification and to create a clear path to a successful exchange, use the following tips as your guide.
- Act Quick. Make this ID period your top priority. You have the option to both put a higher quality asset in your portfolio, increase rents, and defer taxes related to the transaction. Beware! During the holiday season, 45 days can feel more like 20 days.
- Be Patient. As you work through the obstacles that you will be facing as you try to identify, be understanding of other people’s schedules. Don’t rush, but be intentional and decisive. A sure way to irritate those wanting to help you the most is to lose your cool because you think they should do more for you. If somebody is too busy to help you now, find someone qualified and can help. Do not let your frustration set the pace for your progress.
- Internalize Your Purpose. As you work this holiday season on both the identification process for your exchange and the process of securing your intended property, make sure you keep your vision and purpose front and center. Remember what you want, and what you don’t want, and laser focus your effort and attention on what you want.
- Due Diligence. You are going to have little time to do comprehensive due diligence, which may, or may not, include a site visit. Do as much as you can. If you are comfortable with what you see, move forward. If you can’t stomach it, move on.
You got this. You have faced harder things as a landlord. Trust your gut and work toward your vision. It will all come together.
Millcreek Commercial offers fractional tenants in common interests in high-quality commercial real estate across the country. We have helped hundreds of people successfully complete their 1031 exchange by offering replacement properties that are ready for immediate identification, followed by a quick close.