Failed Exchanges

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The questions here were received from interested 1031 exchangers visiting my website. I have chosen to leave the questions intact with their ambiguity, shorthand writing and misspellings so as not to act on the assumption as to what when unclear the questioner meant.

Failed Exchanges

Planning and research are the best ways to prevent a 1031 exchange failure. The most common failure is not being able to purchase your I.D.’s. With pre-planning – such as placing a replacement property under contract and removing contingencies before the investor settles on his sale property, the investor can eliminate failure. The next most common failure, after a lack of I.D.s, is lack of hiring a qualified intermediary and closing without the QI’s paperwork at settlement. Others are bad legal and/or tax advice, not understanding your entity structure, not buying like kind, and thinking somehow an owner take-back loan is OK or a good idea!

Question 1:
Selling rental property 7-8 million (San Fransisco). Real estate exchange in Calif and Tenn. Receive 50% cash 50% mortgage monthly payments over 5 yrs. Title remains with me until contract complete. Eligibility to use 1031 exchange for both 3-4 million also monthly payments eligible for 1031?

Answer:
One option is 50% mortgage payments over 5 years – you pay taxes annually on the principal received, and then, with a balloon payoff, taxes on principal received. Not an exchange.

To qualify the remaining 50% for a 1031 exchange you have to restructure your sale. You must have a Qualified Intermediary who holds the 50% cash and the Deed must change hands.

Question 2:
What happens if you establish 3 properties within the 45 days from close of escrow and all 3 of the properties are sold by the time you can make offers. Can you substitute additional properties after the 45 days if this happens. Thank you

Answer:
A successful exchange needs planning and research. With research, you learn that one can write a contract any time before settlement of the exchange property. You can obtain financing any time before or after settlement. Sadly, if the properties identified all disappear – during the 45 day identification period you cannot do an exchange.

About Marilee: Role of Marilee Hill, Registered Representative (RR)

Marilee has extensive experience in 1031 exchange handling as well as real estate brokering. When she entered into the securitized 1031 exchange arena, she had prior experience in land sales, office and retail sales and leasing, and experience managing her own apartment buildings. That’s in addition to real estate broker licenses in three jurisdictions.

Aside from those technical qualifications, Marilee has also invested time in learning about how the processes for 1031 and other real estate deals involve all of the related parties. Working closely with sponsors is important, and the “people side” of 1031 and real estate is something a professional ignores at his/her own peril. Marilee believes, “My clients success is my success” – and that’s brought her a long way!

Contact Marilee Hill for your next 1031 exchange deal.

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1031 Exchange