Can You Identify a 1031 Property That Is Not for Sale?

Generally, yes. The 1031 identification rules ask for an unambiguous description of the property, delivered in writing to the right party by day 45. They do not require the property to be listed, advertised or under contract. The catch is practical rather than legal. An exchange only works if you actually acquire what you identified by day 180, so a property whose owner never agrees to sell can use up a place on your list and leave you with nothing to close on.

What does the identification rule actually require?

The written identification is a short document, but it has to meet a few conditions that your Qualified Intermediary will check:

• ›It must be in writing and signed by you.
• ›It must be delivered by midnight of day 45 to a person involved in the exchange who is not a disqualified party, usually your Qualified Intermediary.
• ›Each property must be described clearly enough to be identified, typically by street address, legal description or assessor parcel number.
• ›The list must fit one of the identification rules, most often the three property rule, or the 200 percent rule when you name more than three.

Nothing in that list mentions the property being on the market. The rules care about what you name and when you name it, not about whether a broker has a sign in the yard.

Why would anyone identify an off market property?

Plenty of good replacement properties never reach a listing site. Owners mid sale often hear about them in a few common ways:

• ›A neighbouring owner who has mentioned selling but has not hired a broker.
• ›A tenant of a property you already know who says the landlord is thinking of retiring.
• ›A pocket listing a broker is shopping quietly before going public.
• ›A property owned by an acquaintance, which raises the separate question of related party rules if the owner is family or an entity you control.

What is the risk of identifying a property that is not for sale?

Under the three property rule you can name up to three properties of any value. If one of those three belongs to an owner who has only said maybe, you have effectively given up a third of your list for a possibility.

If the owner changes their mind after day 45, you cannot swap in a new property. Identification can generally be revoked before the deadline, but once day 45 passes the list is fixed. Your exchange then depends on the remaining names on the list. If those fall through as well, there may be nothing left to buy, and the exchange can fail with the gain becoming taxable.

How can you reduce that risk before day 45?

You can treat an unlisted property the same way you would treat any other uncertain candidate, by getting as much firmness as possible before the deadline. Some owners use these steps:

• ›Ask for a signed letter of intent or, better, a signed purchase agreement before day 45. A signed contract is not required for identification, but it tells you how serious the owner is.
• ›Confirm who holds title. The person you spoke to may not be the legal owner, or there may be co owners who also have to agree.
• ›Check for anything that blocks a quick sale, such as a lender lockout, a tenant right of first refusal or an estate that has not been settled.
• ›Ask whether the owner can close inside your remaining window. An owner with no deadline of their own may not move at your pace.

How should an unlisted property sit on the list?

Many owners use a simple structure: one primary target, one alternative of similar quality and one backup that is likely to close quickly. An off market property fits more comfortably in the first or second slot when the owner has signed something, and less comfortably as the only realistic option.

Some owners choose the 200 percent rule instead, which allows more than three properties as long as their combined fair market value does not exceed 200 percent of what you sold. That can make room for an uncertain candidate without crowding out safer ones, but the arithmetic needs to be checked carefully. Fair market value at closing, not asking price, is what counts.

Here is an illustrative example only. An owner sells a building for 1,000,000 dollars. Under the 200 percent rule, the combined value of everything identified generally should not exceed 2,000,000 dollars. A list of four properties valued at 700,000, 600,000, 450,000 and 200,000 dollars totals 1,950,000 dollars, which sits under the ceiling. Raise any one of them by 60,000 dollars and the list goes over. Your Qualified Intermediary and CPA can confirm how the rule applies to your figures.

Some owners also name an interest in a Delaware Statutory Trust as one of their backups, because DST interests can sometimes close faster than a whole property. DST interests are securities, offered only to accredited investors through a licensed broker dealer and definitive offering documents, and they carry risk including loss of principal. Whether one belongs on your list is a question for your own advisers, not a default.

Does the description have to be different for an unlisted property?

The standard is the same: unambiguous. For a listed property the listing sheet often supplies the address and parcel number. For an unlisted one you may need to look them up from the county assessor or recorder yourself.

Be specific. A street address alone can be ambiguous when one building sits on several parcels or when a property has a separate lot next door. If you only intend to buy part of a property, the description should make that clear. Your Qualified Intermediary may ask for a legal description or a parcel number before accepting the form.

What happens if the owner agrees after day 45?

If the property was on your list, you can still buy it, as long as closing happens by day 180, or by the due date of your tax return for that year if that comes first and no extension has been filed.

If the property was not on your list, it generally cannot be your replacement, however eager the owner becomes. This is the reason some owners name a promising off market property even when the conversation is early. The cost is a slot. The benefit is keeping the door open.

A plain way to think about it

The identification rules are about naming, not availability. You can name a property the owner has never put up for sale, and that can be the right call when the conversation is genuine. Just remember that the list is fixed at day 45 and the closing clock keeps running. Before you commit a slot to a property that is not on the market, talk it through with your CPA and Qualified Intermediary, and make sure the rest of your list could stand on its own if that owner says no.