When you sell a property and reinvest the proceeds into another property, you can defer capital gains taxes. We will look at 1031 exchange timelines, including what to think about when planning an exchange, and what to do during the identification period, 180-day exchange period, and post-exchange monitoring period.
The 45-day identification period
1031 exchange timelines start with identification. You have 45 calendar days to find a replacement property for your relinquished property. This begins when the relinquished property closes, and is also known as the 45-day rule.
The first step is to find a qualified intermediary (QI). A qualified intermediary is also known as a 1031 exchange accommodator. QIs have to register with the IRS. You will need to provide the qualified intermediary that you choose a legal description, address, and fair market value of the property.
In addition, you will need to make a list of potential replacements before relinquishing your current investment property. Information on this list must be enough to identify the properties. During the identification period, you can add or remove the potential replacement properties that you identify, but the changes have to be reflected in the updated list that you give to your QI within 45 days.
Make sure to also review 1031 exchange rules and regulations in your state during the 45-day identification period, as some states may have specific requirements or regulations you need to adhere to.
The 180-day exchange period
The next key part of the 1031 exchange timeline is the 180-day exchange period. This exchange period gives you 180 calendar days to complete the exchange process and transfer proceeds from the relinquished property to the replacement property.
This timeframe begins immediately on the day following the identification period. It's your responsibility to help facilitate the transfer of funds and complete the sale or purchase of identified replacement properties within 180 days. Your funds must be held in an Exchange Accommodation Title (EAT) account managed by a qualified intermediary. The QI can make sure that the funds remain separate from the investor’s personal funds, and are only used for the purchase or sale of replacement properties.
The 180-day exchange period is a structured timeline, and each step must be completed within the allotted time frame. This includes executing all the necessary legal documents, transferring funds, and closing on the replacement property. You should work closely with your advisor and qualified intermediary to ensure a smooth transition and compliance with all applicable deadlines.
Post-Exchange Monitoring
Monitoring your 1031 exchange is the last step. Typically, you'll have to do this for around 2 years after the exchange is completed. Additionally, it's important to review all the replacement properties you acquire to ensure they still meet the IRS rules and regulations, and review your tax return annually to ensure accuracy.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
