What Is a Delayed Section 1031 Tax Exchange?

What Is a Delayed Section 1031 Tax Exchange?

Posted by on Sep 16, 2021


If you’ve been reading our blogs on a regular basis, you know all about the 1031 exchange. Sometimes called the “like-kind” exchange, Section 1031 of the Internal Revenue Code allows you to “exchange” a current property used for investment or business purposes (the “relinquished” property) into another property (the “replacement” property). Doing so means you can defer capital gains on the disposal of your relinquished property.

This is the basic definition. But there are actually four types of section 1031 tax exchange structures. These are the delayed exchange, the reverse exchange, the simultaneous exchange, and the improvement exchange. The delayed exchange is the most common of the four. Likely as not, you’ll be using the delayed exchange when participating in a like-kind property trade.

Here’s more about what you need to know concerning a delayed section 1031 tax exchange.

In-stone timelines. You must identify your replacement property within 45 days of closing on your relinquished property, a process known as the “identification period.” And closing on that replacement property must occur within 180 days of your relinquished property’s sale; the process here is called the “exchange period.” Incidentally, these are “calendar days.” They take into account weekends and holidays.

Three replacement property options. You can choose from three options when it comes to your replacement property.

  • You can identify up to three properties as potential replacements, with no restriction on price.
  • You can target an unlimited number of replacement properties, subject to a limit of 200% on the price of the property sold.
  • You can target an unlimited number of replacement properties, but the sales number must add up to at least 95% of their total market price.

A QI requirement. All like-kind exchanges require a qualified intermediary, or QI. Without a QI, you could lose the tax deferral benefit of Section 1031. The QI, sometimes known as a 1031 exchange accommodator, holds the funds from the sale of your relinquished property in escrow, then releases the funds when it’s time to close on your replacement property. At no time can you touch any of those funds.

The QI also handles paperwork related to the exchange. This can include the exchange agreement, purchase and sale agreement, and replacement property identification form. While you are the one who signs the forms, the QI maintains it all.

To summarize, the delayed section 1031 tax exchange is the most well-known of like-kind exchanges. It follows a “linear” format, as the relinquished property’s proceeds are moved into the replacement properties. To ensure that your exchange is successful, be sure to work with those who have expertise with the process.

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. There is no guarantee that the investment objectives of any particular program will be achieved. 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. 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.

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