When Can You Go Under Contract on your Replacement Property?

As most 1031 Exchangors are aware, for a standard 1031 Exchange, you must sell your relinquished property and then purchase your replacement property. If you purchase first and sell second, you are doing a Reverse Exchange which is a much more complicated and expensive transaction. However, can you go under contract on the property that you wish to purchase before you are under contract to sell a relinquished property?

The simple answer is yes. The order of the execution of the contract is not relevant to the 1031 process, just the order of the closings.

It is common when one of our 1031 Exchangors wishes to purchase new construction, their builder informs them that the new property will take 9 months to complete. Yet, a standard 1031 Exchange must be completed within 180 days. This means if you sell your property today, the replacement property will not be completed within the allotted time frame and then you cannot make the 1031 work for your needs.

In this situation, you can sign the contract for the replacement property today and wait to sell your relinquished property for a period of time. You may not even list your property for sale until you know your replacement property is due to be completed within 180 days. Then when you sell, you have plenty of time to close on your replacement property (within the required 180 calendar days).

Whenever situations like this arise, you should definitely coordinate with your real estate professional and the builder to be confident that everything will be completed within the requirements of the 1031 Exchange.

For more information, please reach out to your tax professional for specific questions or contact the specialists here at Security 1st Exchange for assistance.