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Foreclosure & Short Sale Replacement Properties

I've been getting a few questions from exchangers asking how to identify replacement property in a 1031 exchange if you want to buy a short sale (SS) or foreclosure  (REO) and cannot rely on the bank to give you a definite answer by day 45.

As you know, in a 1031 exchange you have 45 days to identify new property to buy, and 180 days to close. So what are your options when you want to buy a short sale or REO foreclosure real estate and the bank is in control but couldn’t care less about your exchange deadlines?

The rules for identifying new property in a 1031 are no different in a short sale situation. You can identify up to three parcels of real estate or  properties with no limitations as to price or location. If you ID more than three, the 200% rule kicks in, which says if you ID 4 or more, the total asking prices of the 4 or more properties on your list cannot exceed 200%, or 2X, the sales price of the one piece of real estate that you sold.

The problem is if you find a really cool short sale at a great price and are submitting an offer on it, you may not hear back from the bank until 60 to 90 days out, well past day 45. If you ID that property and the bank rejects your offer, you can either resubmit another offer, and wait, or move along to the next one on your list.

One solution is to ID three pieces of real estate  since there are no price limitations. Identifying more than three and you risk toasting your exchange. Place bids on those three, and as soon as one is accepted, withdraw the other two offers immediately so as not to lose deposits or get yourself in a bind.

Don't make the mistake of only identifying one property, take advantage of what the IRS gives you and stay on top of it with your realtor. Call me anytime if you have questions during the process, toll free 888-659-1031.

~Nace

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Nace Cohen is the President and founder of 1031 Exchange Connection, Inc., an IRC §1031 exchange consultancy based in Naples, FL. He lectures extensively on IRC §1031, consults and structures tax deferred exchanges for Real Estate and Personal Property Exchanges, and provides replacement property alternatives . He is also a CPA and operates an accounting and tax practice specialized in real estate taxation and property management. Call toll-free 888-659-1031 for a free consultation, or visit their web site at www.1031-connection.com.