The 1031 Exchange That Depends on a Deal Not Yet Closed
Marcus closes the sale of a small strip center on March 4, receiving $780,000 of net proceeds that are wired directly to a qualified intermediary. He wants all $780,000 reinvested in a direct participation program. You recommend a tenant-in-common interest in a portfolio of net-leased medical office buildings, but the sponsor's offering is still in its pre-closing escrow and will not release until a $15 million minimum is raised. The sponsor says closing “should happen in August.” Marcus has identified nothing else and owns no other replacement candidates. His CPA filed an extension, so his 2023 return is due October 15. Marcus asks whether the dates are “flexible” if the offering slips.
1. State Marcus's identification and acquisition deadlines and identify anything that could shorten the acquisition period.
Read the worked answer
- Identification deadline: 45 calendar days after the transfer of the relinquished property. March 4 plus 45 days is April 18. Identification must be in a signed written document delivered to the qualified intermediary (or other permitted party) before midnight on day 45. It must describe the replacement property unambiguously and specify the type and amount.
- Acquisition deadline: the earlier of 180 calendar days after the transfer or the due date of the taxpayer's return, including extensions. March 4 plus 180 days is August 31. Because his return is extended to October 15, the 180-day date controls.
If he had not extended, the April 15 due date would have cut the exchange period far short of 180 days - the deadline would have been April 15, not August 31. This is exactly why the extension matters here.
Neither period can be extended by agreement, by the sponsor, or by a late closing, except under IRS relief for a federally declared disaster. Marcus's answer is no: the dates are not flexible.
2. What identification strategy makes sense, and what happens if the TIC offering does not close by the acquisition deadline?
Read the worked answer
He must identify now, under one of the three permitted rules:
- Three-property rule: identify up to three properties of any value.
- 200% rule: identify any number of properties whose aggregate fair market value does not exceed 200% of the relinquished property's value - here, roughly $2.3 million.
- 95% rule: identify more than three and acquire 95% of the value identified.
Practical recommendation: identify the medical office TIC plus at least two back-up replacement properties that are already closed and available, so a slip by this sponsor does not forfeit the exchange. The identifications can be revoked or replaced within the 45-day window but are frozen afterward.
If the TIC does not close by August 31, the exchange fails and Marcus recognizes gain on the $780,000 of proceeds - the QI must release the funds to him, and he has a taxable sale with no deferral. He cannot “roll” the identification into a different property after day 45, and a partially closed exchange only defers gain on the amount actually reinvested. The suitability conversation must include this execution risk explicitly, not just the tax illustration.
3. Your firm is an affiliate of the TIC sponsor and earns both a placement fee and a commission on the transaction, and the sponsor is paying a “marketing support” fee to your branch. What does this require of you?
Read the worked answer
This is a material conflict that must be surfaced before the recommendation, not after.
- Disclose it clearly, in writing and in plain language: the affiliation, the placement fee, the commission, and the marketing support payment. The customer must understand that the recommendation is being made by a party with a financial interest in the specific program, and that comparable programs exist.
- Show the numbers. The Rule 10b-10 confirmation must disclose the firm's capacity and remuneration; the offering document discloses the selling commissions and organizational and offering expenses. Marcus should see how much of his $780,000 is going to fees rather than to real property.
- Satisfy Rule 2111 on the merits. The recommendation must rest on his objectives - deferral, income, and acceptable risk - and be documented independently of the compensation. Affiliate products require a heightened, documented comparison of alternatives.
- Confirm the interest is real property held for investment. A TIC interest must be a direct interest in real property, with the investor treated as a co-owner for tax purposes, or the exchange fails regardless of suitability. Obtain and review the structure opinion, and tell him to confirm with his CPA.
- Conflict-of-interest and outside-business policies. The marketing support fee arrangement needs compliance approval and recording; undisclosed affiliate payments are a classic enforcement target.