It is a truth more or less universally acknowledged that one of the hardest parts about a successful 1031 exchange is finding a suitable replacement property. When it comes to trading up in real estate, it can be difficult to find the right option for your needs: how will you know when you find exactly the right property in the right location and price range and with the right amenities?
For this reason, many potential 1031 exchanges fizzle in the original 45-day identification period. The 45-day identification period is the first portion of the overall 180-day limit: during that time, you as the seller must find and declare (in writing) a suitable replacement property of like kind. If you cannot find a property you wish to purchase in this time, your window for a 1031 exchange closes – and you will find yourself paying those capital gains taxes. Additionally, it's important that you be absolutely sure about your identified property when you officially declare it: once you've made one selection, it cannot be changed after the 45-day period closes.
As a result, many 1031 exchangers find it tempting to backdate documents to satisfy the requirements of the identification time period. This is sometimes done as follows: a suitable property is identified after the 45-day limit, and the individual attempts to bend the rules by sending a letter to the real estate agent (or lawyer) backdated to fall within the 45-day period.
In truth, however, backdating documents is never a smart decision. Any 1031 exchange is a legal process and is subject to plenty of rules and regulations. Backdating any document legally constitutes fraud – and the IRS has not historically looked kindly upon fraudulent activity. If you or any parties involved in the deal are audited, the penalties will most certainly be significant. In this light, note that it is critical to deal with the 45-day identification period with the utmost honesty and integrity.
At the end of the day, however, the hard truth is that it is difficult to find a suitable replacement property. It never seems to fail that as soon as you sell your strip mall, all the formerly eligible properties seem to disappear mysteriously from the market – or that the moment you sell your rented condo, there falls upon your city a great shortage. For this reason, many real estate investors turn to exchangers' clearinghouses. These databases work much like a standard real estate Multiple Listing Service: you can post your own available property and search for others that meet your requirements. The plusses of this system include access to large quantities of information and the privilege of doing business with other smart, like-minded real estate investors who understand what it is your looking for and how to run a smart transaction.
