Don't Commit To An Outright Sale - Start A 1031 Exchange
The Section 1031 tax exchange procedure is one that is best ventured into with a good deal of pre-planning and foresight; the process contains ample opportunity for the unwary real estate investor for costly errors. Taking this into consideration, you might be hesitant to begin a 1031 exchange without a certainty that you will be able to follow the process to its end. In reality, though, the risks involved in an exchange aren't as unmanageable as they might, at first, appear.
Beginning the 1031 process isn't by any means a permanent commitment – in all actuality, many smart property investors who are selling a piece of property will start the process of a 1031 exchange simply to leave the option of exchanging open. This is because, if an investor begins on the path of a 1031 exchange, there are several chances to change one's mind and sell the property outright, while starting out with the intention of selling outright removes altogether the option of conducting an exchange.
There is no real reason to worry about the possibility of changing your mind during the course of a 1031 tax exchange. All you actually have to do in order to keep your options open is to be attentive to the deadlines involved in the process, as they'll be the major determining factor of when you will get the opportunity to collect the money that would've been transferred to your 1031 replacement property had you gone through with the exchange.
After closing on the sale of your relinquished property, the proceeds are sent straight to your intermediary. Once this has happened, the the first chance you will have to retrieve your proceeds from your qualified intermediary is after a period of 45 days, in which time you are supposed to have identified a suitable 1031 replacement property. If this deadline arrives and you still have not made an identification, the exchange will be terminated and you will be able to collect your proceeds. If you have made an identification before deciding that you would like to terminate the exchange, simply revoke the identification before the 45 days are over, and the exchange will end.
If you've already completed this stage of the 1031 process, the next opportunity to collect your 1031 proceeds will be 180 days from the end of the 45 day period, the deadline for closing on the purchase of your 1031 replacement property. However, if your federal income tax return occurs during the 180 days, you may shorten this waiting period. Provided that you do not request an extension on your return, you may, at this point, inform your qualified intermediary that the exchange is over and collect your {proceeds.
In the end, it's always best to be prepared for any circumstances that might arise; starting a 1031 exchange when you're not certain what the future may hold can, in fact, be advantageous, in that it keeps all of your options available. As long as you take note of the deadlines involved in the process, you are at liberty to change your mind regarding your exchange in the event that there is a change in your circumstances.
