Your Identified Property Just Fell Through

It is day 62. You closed your sale in June, you identified on day 44, and the building you wanted has just fallen apart. The seller pulled out, or the inspection turned up something expensive, or the lender changed their mind about the appraisal.

Your first instinct is to find another property. That instinct is wrong, and understanding why is the difference between a deferred gain and a tax bill.

You cannot identify a new property after day 45. The list you signed and delivered to your Qualified Intermediary is closed. It does not matter that you are only on day 62 of 180, that you have a better property in front of you, or that the failure was nobody's fault. The identification window shut at midnight on day 45 and it does not reopen.

This article explains what your options actually are at that point, and the one decision made back on day 44 that determines whether you have any. It is educational only and is not tax or legal advice. Confirm your position with your Qualified Intermediary and your CPA.

What the rules allow, and when

Before day 45 you have real flexibility. You may revoke an identification and replace it, as many times as you like, provided each revocation is in writing, signed, and delivered to your Qualified Intermediary before the deadline passes. Plenty of exchangers change their list twice in the first six weeks.

After day 45 that flexibility is gone completely. From that moment you may only acquire property that appears on the list, and the list is whatever it said at midnight.

So on day 62 your options are limited to exactly three:

• ›Close on another property already on your list. This is the only clean outcome, and it is only available if you put something else on the list.
• ›Revive the failed deal. Sometimes possible, rarely on your timetable, and never something to depend on.
• ›Accept that the exchange fails. The sale becomes fully taxable for the year, with capital gains, depreciation recapture, the net investment income tax and state tax all landing at once.

There is no fourth option. This is why the single most valuable thing you can do on day 44 costs nothing at all.

The insurance policy nobody takes out

The most common identification rule is the three property rule: you may name up to three properties of any value, with no ceiling. Most exchangers name one. They have found the building they want, they are confident, and naming alternatives feels like inviting failure.

Naming three costs nothing. There is no fee, no obligation and no commitment. You are not agreeing to buy anything. You are simply preserving the right to buy it if you need to, and you either use that right or you do not.

An identification with one property on it is a plan with no margin for error, in a process where roughly one commercial transaction in five does not complete for reasons entirely outside the buyer's control.

The practical version of this is to name your first choice, then a genuine second choice, then something that can definitely close. That third slot is the one that matters when things go wrong.

The part people do not expect

Here is the detail that makes a failed exchange worse than it sounds.

Your money does not come back.

Your Qualified Intermediary is restricted by regulation in when it may release funds. Broadly, that is after day 45 if you identified nothing at all, after you have acquired everything you identified, or at the end of the 180 day period. A failed deal on day 62 fits none of those.

So the exchange is dead, the tax is already certain, and your proceeds sit in the intermediary's account for another four months while you wait for day 180. You cannot spend them, invest them elsewhere, or use them to buy the better property you found on day 63.

Owners are routinely more shocked by this than by the tax itself.

Why a Delaware Statutory Trust is the usual third slot

There is a reason DSTs so often appear as the second or third identification on a list, and it is not primarily about their merits as an investment.

A conventional property purchase is a transaction. There is a seller who can withdraw, a lender who can re-trade, an inspection that can fail and a closing that can slip. Any of it can collapse, and a collapse after day 45 leaves you with no way to replace it.

A DST is different in one specific respect: the sponsor has already bought the building. The financing is arranged, the diligence is done and the offering documents exist. Subscribing is paperwork rather than a transaction, which is why it can complete in days rather than weeks. There is no counterparty who can walk away from you.

That is what makes it useful as a backup. Naming one in your third slot costs you nothing and commits you to nothing, and if your primary deal survives you simply never use it.

Two honest points. DST interests are securities available to accredited investors only, so this option is not open to everyone. And a DST that you would not be content to own is not a backup, it is a different problem for later. If you name one, name one you would genuinely accept.

What to do, depending on where you are

If you have not identified yet. Use all three slots. Name your first choice, a real alternative, and something that can close quickly. It costs nothing and it is the only protection that exists against exactly this situation.

If you have identified and everything is fine. Look at your list today rather than in five weeks. If it names one property, you have no fallback, and if you are still inside day 45 you can still fix that. If you are past day 45, at least you now know your exposure.

If your deal has just failed. Check your list first, then speak to your Qualified Intermediary the same day. If there is a second name on it, the question is whether it can close inside the days remaining, and that answer depends on what it is. If the list has only one name, the conversation moves to your CPA and to limiting the damage.

The short version

The 45 day deadline is not really about finding a property. It is about closing the list of properties you are allowed to buy. Miss that distinction and a routine deal failure on day 62 turns into a taxable sale you cannot prevent, plus four months of watching your own money sit in someone else's account.

Three slots. They cost nothing. Use them.

Not sure whether what you have named can actually close in the time you have left? Tell us your closing date and what is on your list, and a licensed specialist will tell you honestly what is realistic. Free, and no obligation.

About this article. 1031Property is an independent information and referral service. We are not a broker dealer, a Qualified Intermediary, a tax adviser or a law firm, and we do not sell securities or property. Nothing here is tax, legal or investment advice. Delaware Statutory Trust interests are securities offered to accredited investors only through a licensed broker dealer and definitive offering documents, and investing involves risk including the loss of principal. Confirm every date and figure with your own Qualified Intermediary and CPA.