1031 Exchange in Phoenix: Preparing to Identify and Buy a Rental

In a 1031 exchange you have 45 days from your sale to identify replacement property in a signed writing, and Phoenix rentals can go under contract fast. Choose your identification method and your back-ups before you close.

The short answer

If a Phoenix rental will be your replacement property, three things decide whether the exchange holds together. You identify it correctly within 45 days of selling your old property. You receive it by the earlier of day 180 or your tax return due date, including extensions. And it is held for investment or business use, not as a home. Arizona adds little at the closing table (no transfer tax, a $2 fee when the deed is recorded), so most of the work is in the identification and the paperwork.

Where are you in the process?

• Selling first (in Phoenix or anywhere else). Put the exchange in place before your sale closes, and line up Phoenix candidates and back-ups before closing, not after.
• Buying first (the Phoenix rental is ready before your sale). That is a reverse exchange; the accommodation titleholder must be in place before you buy (Rev. Proc. 2000-37; Rev. Proc. 2004-51). See reverse 1031 exchanges.
• Already closed and received the proceeds. The regulations treat that as a sale (Treas. Reg. §1.1031(k)-1(f)). Talk to your CPA.

Educational next steps, not an eligibility determination.

How identification works, and which method fits a Phoenix search

Identification must be a written document signed by you, sent before the end of day 45 to the person selling you the replacement property or to another person involved in the exchange, such as your intermediary, escrow agent or title company. It cannot go to you or to your own agent (Treas. Reg. §1.1031(k)-1(c)(2)). Describe each property by legal description, street address or distinguishable name (§1.1031(k)-1(c)(3)).

You can identify under one of these rules (§1.1031(k)-1(c)(4)):

Illustration, with numbers invented only for the arithmetic: if you sold a property for $600,000, the 200% rule lets you identify any number of properties whose combined value is $1,200,000 or less.

You may revoke an identification and name a substitute before day 45 ends, in a signed writing sent to the same person (§1.1031(k)-1(c)(6)). Property you actually receive within the 45 days counts as identified (§1.1031(k)-1(c)(1)). After day 45 there are no changes. More detail: identification rules and the 45-day rule.

Investment use: the facts to keep

Section 1031 covers real property held for productive use in a trade or business or for investment (26 U.S.C. §1031(a)(1)); it does not apply to property used solely as a personal residence (Rev. Proc. 2005-14). Neither the statute nor the regulations set a general minimum holding period.

For a dwelling unit you also use personally, such as a winter home, the IRS has a safe harbor. It will not challenge investment status if you own the unit for at least 24 months after the exchange and, in each of those two 12-month periods, rent it at a fair rental for 14 days or more and keep personal use to no more than the greater of 14 days or 10% of the days it is rented at a fair rental (Rev. Proc. 2008-16). Missing the safe harbor doesn't automatically disqualify a property; it means your facts have to carry the argument. Keep leases, rent records and a use calendar. See vacation homes and 1031 exchanges.

Arizona at the closing table

• No real estate transfer tax. Arizona's constitution bars new taxes or fees on the transfer of real property, keeping only those in effect on December 31, 2007 (Ariz. Const. art. IX, §24).
• A $2 fee and an Affidavit of Property Value are recorded with the deed (A.R.S. 11-1132 and 11-1133). County recording fees are separate; your title company will confirm them.
• State income tax. Arizona's income tax starts from federal adjusted gross income and follows the Internal Revenue Code as of a set conformity date (A.R.S. 43-105). Confirm the Arizona treatment of your exchange with your CPA, especially if you live in another state.
• Withholding. We found no Arizona withholding on nonresident sellers at closing, only an information-return duty for escrow agents (A.R.S. 43-312). Your closing agent and CPA can confirm for your sale.
• Intermediary rules. We did not find an Arizona statute setting bond, insurance or account rules for qualified intermediaries, so those protections come from your intermediary's contract and your own questions. Ask how your funds will be held, and for bond and errors-and-omissions evidence in writing.

The two clocks

45 days to identify; then receive the property by the earlier of day 180 or your return due date including extensions (26 U.S.C. §1031(a)(3)). Count your dates in the deadline calculator.

Before closing: identification prep for a Phoenix purchase

Watch

General rule explainer — not recorded for Phoenix

45 Days. That's the Rule. · 21 seconds

This short clip covers the 45-day deadline itself. The 3-property, 200% and 95% methods are explained in the text above, not in the clip.

A hypothetical sequence

Hypothetical — not a client and not a result. An investor sells a rental in another state for $600,000 and wants two single-family rentals in the Phoenix area. Before the sale closes, she shortlists five candidates with her broker. Because she wants more than three options, she checks the 200% rule: the five she identifies must total no more than $1,200,000 in value at day 45. On day 30 one goes under contract with someone else; she revokes that identification in writing and names a substitute before day 45. After closing she keeps signed leases for both purchases. Whether the exchange defers her gain depends on her actual facts and filings.

Frequently asked questions

How many Phoenix properties can I identify?

Up to three of any value, or any number whose combined value at day 45 is no more than 200% of what you sold. If you exceed both, the identification fails unless you acquire at least 95% of the value identified (Treas. Reg. §1.1031(k)-1(c)(4)).

Can I change my identification if a property falls through?

Yes, before day 45. Revoke it in a signed writing sent to the same person who received the identification, and identify a substitute. After day 45 you can't (§1.1031(k)-1(c)(6)).

Can I use a Phoenix replacement property as a winter home?

A property used solely as a personal residence doesn't qualify. For a dwelling you partly use yourself, Rev. Proc. 2008-16 gives a safe harbor based on 24 months of ownership, at least 14 fair-rental days a year, and limited personal use (Rev. Proc. 2005-14; Rev. Proc. 2008-16).

Does Arizona charge a transfer tax on the purchase?

No. Arizona has no real estate transfer tax; a $2 fee applies when the deed is recorded, plus county recording fees (Ariz. Const. art. IX, §24; A.R.S. 11-1132).

How long do I have to hold the Phoenix rental?

Neither the statute nor the regulations set a general minimum; the question is whether you held it for investment. The 24-month figure applies only to the dwelling-unit safe harbor, and a separate two-year rule applies to exchanges with related parties (26 U.S.C. §1031(a)(1) and (f); Rev. Proc. 2008-16).

Who you'll work with

Leah Badach is a Certified Exchange Specialist with 11+ years of 1031 exchange experience. Standard, reverse and improvement exchanges are all available. Before you sign, Leah confirms in writing which qualified intermediary will hold your funds and gives you its account, bond and insurance documents. The intermediary receives your identification and holds the exchange funds. You can verify the credential in the FEA CES directory.

Related: 1031 exchanges in Arizona · Identification rules · 1031 exchanges for rental property · One property into several · Buying replacement property out of state · Questions to ask any qualified intermediary

Sources

• 26 U.S.C. §1031: investment use, the 45- and 180-day periods, and related-party exchanges.
• Treas. Reg. §1.1031(k)-1: identification (who receives it, descriptions, the 3-property, 200% and 95% rules, revocation) and actual or constructive receipt.
• Rev. Proc. 2005-14: property used solely as a personal residence.
• Rev. Proc. 2008-16: the dwelling-unit safe harbor.
• Rev. Proc. 2000-37 and Rev. Proc. 2004-51: reverse exchanges.
• Arizona Constitution, art. IX, §24: no new taxes on transfers of real property.
• A.R.S. 11-1132 and 11-1133: the $2 fee and the Affidavit of Property Value.
• A.R.S. 43-105 and ADOR on IRC conformity: Arizona's starting point for income tax.
• A.R.S. 43-312: escrow information returns.

Educational information, not tax or legal advice.