How Much Time Do You Have to Complete a 1031 Exchange?
A 1031 Property Exchange is the best tax-free strategy to sell your real estate investment property and purchase another while avoiding any payment on your capital gains.
In order to successfully complete a 1031 Exchange, adhering strictly to the exchange timeline as per Section 1031 of the code of the Internal Revenue Service (IRS) is a must. Before embarking on a 1031 Exchange, however, make sure you know and understand the type of exchange you want to complete, as well as each deadline in order to close your perfect deal without risking thousands of dollars of tax liability.
Below are the different types of exchanges, and the timelines that go along with them.
General 1031 Exchange Timeline
A real estate investor will have 45 days, beginning from the time when the relinquished property is closed, to identify potential replacement properties.
The complete exchange has to be made within 180 days, which includes the 45 days provided for the exchange property identification.
45 Day Identification Window
In a 1031 Exchange, when you close on the sale of your original property, you get 45 calendar days for identifying potential replacement properties for the exchange.
Before the midnight on 45th day, you have to provide an unambiguous written description of your potential replacement property.
You may identify up to three replacement properties and acquire any or all of those three, or you may identify any number of replacement properties you want as long as the total market value does not exceed 200% of the value of the property or properties you sold as part of the exchange.
You may also choose to identify any number of properties as long as your acquired properties are valued at 95% or more of their total value.
As per Section 1031 of the code of the Internal Revenue Service (IRS), to qualify as an identification, the exchange properties need to be purchased and closed within the 45-day 1031 exchange timeline.
180 Day Purchase Window
The 1031 property exchange must be completed within 180 days or within the due date of your income tax return for the year in which the relinquished property was sold.
A 1031 exchange can occur when the exchange of properties is closed simultaneously on the same day through a ‘swap’ of deeds between two parties, or a third ‘accommodating party’ that facilitates the simultaneous transaction, or structuring the entire transaction by a qualified intermediary.
Any delay in a simultaneous exchange can disqualify the property exchange from tax exemption.
This is the 1031 property exchange most commonly chosen by real estate investors. The delayed exchange has a convenient 1031 exchange timeline. It allows you to first find a replacement property within 45 days and execute the exchange agreement, and then hire an Exchange Intermediary to initiate the sale of your property and hold the sales proceeds while you acquire a ‘like-kind’ property within 180 days.
Also known as a forward exchange, this is an all-cash 1031 property exchange that occurs simply through acquiring a replacement property within 45 days before you exchange your relinquished property within another 135 days.
Construction or Improvement Exchange
This 1031 property exchange allows you 180 calendar days to use exchange equity for improving the replacement property through a qualified intermediary.
Make sure you have a clear picture of the type of exchange you plan to execute, so you are best prepared to meet each deadline and complete your exchange successfully.