A 1031 exchange is a fantastic real estate investing maneuver that allows allow the deferment of capital gains tax, depreciation recapture tax, healthcare tax, and state tax on the sale of investment and business-use property. But, exactly how does a 1031 exchange work? These transactions are for business use or investment property only. And, there are critical timing rules of a 1031 exchange you must adhere to regarding identifying replacement property and closing on the replacement property after your original property sells.
Timing rules for selling and buying (exchanging) property using 1031s
The 45-day rule starts when you close on your relinquished property:
- You have 45 days from the time you close on your relinquished property to identify up to three replacement properties, and to send that information to your qualified intermediary.
- If you decide to only identify three properties, their purchase price can be any value. Note: You can identify more than three properties, but the combined value of all cannot exceed 200 percent of the relinquished property’s sale price. This rule only applies when you identify more than three properties.
- If you are unable to identify replacement properties within the 45-day timeframe, the exchange is over with no tax deferral.
The 180-day rule also begins on the day your relinquished property sells:
- You have 180 consecutive days from the day you sell your relinquished property to close on one or more of the properties you identified during the first 45 day window.
- On the 180th day, your exchange must be complete.
- Failing to close on the property within this time frame voids your exchange.
Timing rules of a 1031 exchange are crucial, but there are other aspects that determine how 1031 exchanges work successfully:
When performing a 1031 exchange you must use a qualified intermediary (QI) such as Midland 1031. Also, Certified Exchange Specialists® (CES®) are recommended to ensure the complex elements of your exchanges are performed in compliance with the IRS and within the timing rules of 1031 exchanges.
Not only is Midland a QI, but we have two CES® team members on staff to ensure your process is completed seamlessly and satisfactorily so you can continue building investing income on real estate assets.
To learn more or to start your exchange, contact Midland 1031 at 239-333-1031 or visit the exchange section of our website to discover more about how 1031 exchanges work today.
Editor’s note: This blog was originally published in May 2016 and has been updated for accuracy and comprehensiveness.