1031 Exchange Timeline

1031 exchange is the swap of two similar investment properties that defer the capital gains taxes but there is a timeline in which the swap must occur. In this article, we will explain the time period you should know when looking to 1031 exchange two investment properties.

If you’re in the market for a property to sell and buy another, a 1031 exchange may be an attractive option. But be aware of the timelines that must be fulfilled to complete this transaction successfully.

Two critical deadlines must be observed: a 45-day identification period and a 180-day acquisition. Adherence to these timelines is necessary to avoid capital gains tax liability.

The Relinquished Property

The relinquished property is the real estate investment property sold and transferred from its original owner to a new buyer through a tax-deferred 1031 exchange. It’s often the first asset an investor sells, and qualifying for this exchange requires relinquishing certain rights in that property.

The IRS sets deadlines that must be observed for a transaction to qualify as a 1031 exchange. Adherence to these timelines is necessary to avoid selling the relinquished property and consequent tax liability.

Furthermore, the replacement property must be of like kind to the relinquished property in terms of both nature, function, and value.

Property must be either a residential rental or commercial asset held for investment purposes. Personal use properties, such as vacation homes, are ineligible for 1031 exchange but can still be converted into commercial or residential rental assets.

The Replacement Property

A 1031 Exchange allows investors to defer capital gains taxes when they sell an investment property. Typically, this involves selling the actual property, shortlisting several potential replacement properties, and purchasing one within a specified time frame.

To guarantee a valid exchange, the IRS requires both properties to be like the kind in terms of function, location, and size.

The IRS has specific rules regarding what properties qualify for a like-kind exchange. Real estate is one example, but other personal property such as machinery, equipment, vehicles, boats, aircraft, and artwork may also qualify.

The Exchange Period begins when a property is relinquished and ends 180 days from that date. The time frame may differ depending on whether it is a delayed or reverse exchange.

The Qualified Intermediary

A qualified intermediary (QI) is essential in the 1031 exchange process. From completing all required paperwork for the IRS to hold your funds in escrow, the QI plays a significant role.

Your QI will hold the proceeds of your relinquished property in a segregated account and work with you on the replacement property to coordinate its acquisition and transfer of deeds. After the new owner takes possession of the replacement property, your QI will transfer its funds back to you.

1031 exchanges come in several forms, including forward, reverse, and construction. The most popular type is a forward exchange; this requires identifying potential replacement properties within 45 days after closing your existing property sale. After this, you have 135 days to purchase the replacement property and then 180 days overall to complete the exchange.

The Closing

A 1031 exchange is a helpful tool for real estate investors to defer taxes and expand their investment portfolio. However, the timeline rules can be complex, necessitating expert guidance to avoid potential tax liabilities.

One of the essential steps in an efficient 1031 Exchange is closing on the relinquished property. A qualified intermediary will handle the funds from the sale and deposit them into an insured escrow account until they can be used to acquire your new replacement property.

According to the type of 1031 Exchange, replacement property can either be newly constructed or renovated. Furthermore, it must meet specific criteria, such as being a like-kind investment (i.e., not primarily for sale).

When calculating the amount needed to invest in a replacement property, sellers should consider non-allowable expenses and costs. For instance, a security deposit charged against them may reduce the net proceeds from the sale.

The 1031 exchange is actually very common and investors even refer to one another saying let’s 1031 this or that building to another.

What are 1031 exchange timelines?

As simple as it is there are two timelines you should know about when 1031 exchanging investment properties.

First 45 Days

The first timeline is the first timing which is 45 days. In this initial 45 day timeframe, the intermediary which is the middlemen that hold the cash must be furnished with a statement that shows the replacement property. You can think of this as selecting the replacement property and identifying the property.

45 to 180 Days – Second Timing

The replacement property must be closed within 135 days after the initial 45 days. From the first day of the 1031 exchange, you will have 180 days to finish off the sale of the old property and close the acquiring of the new property. Think of this last timeline as finalizing everything and concluding the exchange.

For the answers of your questions and the complete guide, read 1031 exchange rules.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button