45-Day Identification Period. You must identify potential replacement properties within 45 calendar days from the time you sell your property.
180-Day Closing Period. You must complete the purchase of a new property or properties within 180 calendar days from the time you sell your property. The 45-day and 180-day time periods start at the same time -- you do NOT get 180 days after identifying properties. To make matters a bit more complicated, there is a caveat to this rule. Technically, you must close on the new property the earlier of a) 180 calendar days or b) the due date for filing your tax return for the year in which the property was sold. Talk to your accountant early on to understand your dates and possible filing extensions.
Report your Exchange. You must report your exchange to the IRS in the year in which you sold your property. The IRS provides a special form to do this (IRS Form 8824) and it must be included with your tax return for that year. Have your accountant help you.
IDENTIFICATION
Identification Options. We just mentioned that you have 45 days to identify potential properties for your exchange. That may seem like a tight timeframe to find the right fit. Fortunately, the IRS allows you to identify more than one possible property according to one of the following rules:
Report your Identified Properties. You must formally identify your potential replacement properties. Identification needs to be:
FINANCIAL
Purchase Price. The purchase price of your replacement property must be equal to or greater than the sale price of your relinquished property.
Mortgage Balance. Likewise, the mortgage amount on your replacement property must equal or exceed the mortgage balance you paid off when selling your relinquished property.
PROCEDURAL
Buy what you identified. You must purchase a property (or properties) that is substantially the same as what you identified.
Don’t Touch the Cash! The IRS requires the use of a Qualified Intermediary to complete a 1031 exchange. Your QI must hold your proceeds during your exchange. You may not receive, or have direct access to, your proceeds in any way during the exchange process. For instance, having the funds in your bank account, even if you do not make a withdrawal, is prohibited.
Same Taxpayer. You must acquire the replacement property under the same legal entity that was the seller of your relinquished property. If you bought your previous property in your own name, you need to acquire the replacement property in your own name. If you bought your previous property using an LLC or trust, you need to use the same LLC or trust to purchase the replacement property.
Failure to follow the rules may result in the transaction being treated as a taxable sale rather than a tax-deferred exchange. Plan ahead to avoid this. Your accountant, attorney, and QI are all on your team. Consult your advisors early and often!