Proactive Planning to Prevent Failed 1031 Exchanges

I realized that my last two posts were a little depressing in that they were addressing failed 1031 exchanges, so I thought I would flip the topic over to proactive planning to prevent failed 1031 exchanges.

There are a number of strategic planning points that could help you avoid the experience of a bad 1031 exchange transaction, and they all have one thing in common - planning ahead or proactive planning. Procrastination is your worst enemy because your 45 and 180 day 1031 exchange deadlines fly by way too fast.

So, the bottom line is you need to be proactive and plan your 1031 exchange transaction well in advance. Those who plan will have little frustration during the actual 1031 exchange transaction.

You should start looking for property as soon as you know that you are going to sell property and structure a 1031 exchange. Do not wait until your property sells or is in escrow or is a sure thing. The best plan is to plan to close the sale of your 1031 exchange relinquished property and the close the purchase of your like-kind replacement property simultaneously. It is difficult to do so, but you can at least shoot for it.

Instruct your real estate agent to negotiate contingent language into your purchase and sale agreement that the buyer of your 1031 exchange relinquished property will wait until you have located suitable like-kind replacement property. Or better yet, find your like-kind replacement property first and negotiate contingent language that the seller of your like-kind replacement property will wait to close until you have sold and can close on your 1031 exchange relinquished property. The ability to negotiate this language will depend on the market cycle that you are in. Today, sellers are desperate for buyers, so you have a good chance to get what you want.

You might be able to lock up the like-kind replacement property by using a lease with a purchase option as well. This way, you've got control over the property and can exercise the option when you have sold your 1031 exchange relinquished property and are ready to sell.

The offer to release the earnest money deposit early on a refundable or non-refundable basis can also be a great strategic ploy to get the seller to cooperate with you as well. It lets them know that you are serious because you are willing to put your money where your mouth is.

Reverse 1031 Exchanges are becoming more and more popular as well. The reverse exchange allows you to acquire your like-kind replacement property first and then you have 45 days to identify what you are going to sell, which you probably already know, and 180 days to actually sell and close on your sale. You do not have to worry about any 1031 exchange deadlines up front because you have not sold your 1031 exchange relinquished property yet. You might want to read "Why Would You Use A Reverse 1031 Exchange?" for more complete information on reverse exchange transaction.

You may also want to consider investing in tenant-in-common investment properties as your like-kind replacement property, especially if it looks like your 1031 exchange transaction may actually fail. The TIC property might be a life saver. You should read "Brief Overview of Tenant-In-Common Investment Property Interests or TICs" for more complete information on TIC investment properties as a solution for your 1031 exhange.

The most important thing is that you must be proactive and plan your 1031 exchange transaction. Careful planning will go a long way.