As I understand it, the property acquired in a 1031 exchange must be identified within a month and closed on within three months of the sale of the property disposed of. This works great in an up-market, but not so great in a down-market. Particularly in this market just beginning the down slope where few sellers have come to the realization that their properties are not worth nearly what they were just few months ago.
So is there a way to drag-out a 1031 trade transaction so that an investor can dispose of his property at a past the peek but not yet bottomed out price and acquire a replacement property at a closer to the bottom price somewhere beyond the 1031 one and three month time limits? For instance, could the proceeds be held by the trust company or similar entity in the interim? Are there any 1031 trade saving financial vehicles (managed funds, managed partnerships, etc.) in which proceeds could be parked in between disposal of the former property and acquisition of the latter property? Any other way to advantage of a declining market and avoid capital gains where it is unlikely to be able to identify the property to be acquired within a month of the former property’s disposal?
You can take up to 45 days from the date of the sale of your relinquished property to formally identify as many as three replacement properties. You have an additional 135 days to complete the acquisition of your replacement property(ies) from your list of identified properties.
The exchange window spans a total of 180 days, not the 90 days that you mention. There are no extensions beyond 180 days.
A qualified intermediary must hold the exchange proceeds until the exchange is complete. The iintermediary is free to invest the exchange proceeds in any interest bearing vehicle available to the prudent fiduciary. During a recent exchange, my bank trust department acted as my qualified intermediary. They held my exchange funds nearly six months during which time I earned about 4% APR while my funds were deposited in a money market account.
If you take possession of the exchange funds before the exchange is closed, you have disqualified the exchange and the sale of your relinquished property becomes a taxable event.
One of the best ways to extend the time is to push the closing back on the property you are selling. For example instead of closing in November have the closing in January. You can still be looking for exchange property with a contract pending.
You can also look into structuring a reverse 1031 exchange transaction where you can take all the time you need to acquire the right like-kind replacement property. Once you have acquired the replacement property you have 45 days to identify what you are going to sell and 180 days to complete the sale. These are much more complicated. The Qualified Intermediary must acquire and hold or park title to one of your properties while you are attempting to sell your existing property, but it is a great strategy when you are concerned about the 45 day identification period.
great point by the previous poster as I had forgotten about that option. I explored it once as I went down the wire on the idetification period about 4 years ago before things got really hot and you could sell property in a blink of an eye. It can be quite pricey compared to a normal exchange, BUT if you do the math it is worth it even for a very modest size gain.
Note, find replacement property FIRST, then sell relinguished property.