An investor must identify a like-kind property to a Qualified Intermediary within 45 calendar days from the close of the relinquished investment.
What is a Like-Kind Property?
A 1031 exchange allows taxpayers investing in real estate to defer capital gains taxes when relinquishing one property and replacing it with another investment by using funds from the sale. To do this, the replacement property in the exchange must be a like-kind property.
The term like-kind is broad, and almost any type of property can be considered like-kind if its primary purpose is to be used for business or investment.
The property does not need to be the same type as the original investment property. For instance, a commercial business can be like-kind to a townhome.
However, there are a few guidelines to keep in mind.
- The named property cannot be a primary or secondary residence of the investor. It must be for investment purposes only.
- Like-kind properties must be in the United States.
- The property does not have to be the same type as the relinquished investment.
- It is possible to exchange from one investment property into multiple properties. All replacement properties must be named within the 45-day time frame.
Details About the 45-Day Time Frame
Keep in mind the time frame to name a like-kind property is 45 calendar days from the close of the relinquished party, not business days.
Here are some things to keep in mind:
Prepare in Advance. The 45 days can go by very quickly. Because of this, it is helpful to make plans as early as possible. In some cases, if the investor is coming close to the 45-day deadline, or does not have any leads on a replacement property, they can ask the buyer of the relinquished property to delay the closing. However, this isn’t a guarantee.
Multiple Replacement Properties. If the exchange involves more than one replacement property, the investor must name all properties within the 45-day period.
Do It in Writing. Always submit your replacement property to the seller of the replacement property and the Qualified Intermediary in writing. The written notification must include the taxpayer’s signature and a specific description of the property.
Making Changes. If there is a change in the replacement property chosen, it can be changed within the 45-day timeframe. However, deciding to change replacement properties does not restart the clock.
What Happens If A Property Isn’t Named?
If the taxpayer does not identify a replacement investment within the 45-day period, the transaction will not be tax-deferred and capital gains taxes would apply.
Other Time Frames to Consider in a 1031 Exchange
The entire exchange transaction needs to be completed within 180-days of the close of the relinquished property. While the transaction needs to close within the 180-day exchange period, the 45-day requirement is the first to consider when completing a 1031-exchange.