A 1031 exchange is a tax-deferred strategy that allows investors to sell one property and buy another of equal or greater value without paying capital gains taxes. However, this process is not as simple as it sounds. There are strict deadlines and rules that must be followed to qualify for the tax benefits. In this article, we will explain the timelines for 1031 exchanges and what you need to know before you start one.
The first deadline you need to be aware of is the 45-day identification period. This is the time frame in which you must identify the potential replacement properties that you want to buy. The clock starts ticking from the day you close the sale of your relinquished property. You can identify up to three properties of any value, or more than three properties as long as their total value does not exceed 200% of the value of the relinquished property. You must provide a written identification of the properties to a qualified intermediary or another party involved in the exchange, such as the seller or the title company. The identification must include the address, legal description, and purchase price of each property.
The second deadline you need to be aware of is the 180-day exchange period. This is the time frame in which you must close the purchase of the replacement property or properties. The clock starts ticking from the same day as the 45-day identification period, and it runs concurrently with it. This means that you have 180 days in total, not 225 days, to complete the exchange. You must acquire the same properties that you identified in the 45-day period, or you will lose the tax benefits. You must also use a qualified intermediary to hold the proceeds from the sale of the relinquished property and transfer them to the seller of the replacement property at closing.
There are some exceptions and extensions that may apply to the timelines for 1031 exchanges. For example, if the due date of your tax return falls before the end of the 180-day exchange period, you must either file an extension or complete the exchange before the due date. Another exception is if the property you are selling or buying is located in a federally declared disaster area. In that case, you may be eligible for an extension of up to 120 days, depending on the circumstances. However, these exceptions and extensions are not automatic and may have additional requirements. You should always consult with a tax professional and a qualified intermediary before you start a 1031 exchange to make sure you comply with all the rules and deadlines.