The total time frame for a 1031 exchange is 180 days. The clock starts once the relinquished property closes. However, there are cases when the timeframe is compressed and doesn't allow for the full 180 days. Investors who are looking to do a 1031 exchange need to be aware of when they may not have the full exchange period available to them.
1031 Exchange Deadlined Explained
As mentioned in the introduction, investors have 180 days to complete a 1031 exchange. Once the relinquished property closes, the investor has 45 days to identify a replacement property. The 45 days count against the total 180 days, leaving 135 days to complete the exchange.
Some investors incorrectly believe the total time frame is 45 + 180 days, giving them 225 days to finish the exchange. Just be aware that from start to finish is 180 days to complete the exchange.
As 45 days can seem like a mission impossible, investors will often identify a property before closing on the relinquished property. In this case, they don't need 45 days, and the total exchange usually closes well within six months.
However, starting an exchange at the end of the year can result in a compressed time frame.
Shortened 1031 Exchange Deadlines
These shortened deadlines come into play around the year's end. 2023 tax returns are due on Tuesday, April 18. That's the same date any 1031 exchange started in 2022 must be completed.
Looking at the dates starting in 2022, the last day to start a 1031 exchange with the full 180 days is October 21, 2022, which is a Friday. So any day after October 21 means a shorter timeframe to complete a 1031 exchange.
Imagine starting the exchange on December 15. This only gives the investor 124 days or 56 fewer days to complete the exchange. They have 45 days to identify a replacement property, with a deadline of January 29. Then the exchange must be completed by April 18. Any investor who thought they had until June 11 (180 days) or even July (21) would be in for a disappointing surprise.
This compressed timeline is a result of Section 1031 (a)(3)(B) of the tax code, which states:
- 180 days after the date the relinquished property is transferred in the exchange.
OR - The due date of the taxpayer's return for the taxable year in which the relinquished property is transferred.
The replacement property must be purchased by the earlier of two possible dates:
However, unsuspecting investors stuck in this situation are still in luck. They can file an income tax return extension. This will have the added benefit of providing investors with the full 180-day exchange period.
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.
Hypothetical examples shown are for illustrative purposes only.
