IRS 1031 Exchange Timeline
We’ve explained what a 1031 exchange is , how it works, the requirements , and the benefits. The last piece you need before you’re fully informed is the 1031 exchange timeline. We mentioned it briefly in our previous blog, but we’re going to expand on it.
Day 1 of the 1031 Exchange Timeline
The 1031 exchange timeline begins on the day you close on the sale of your property. From day 1, you have 45 days to identify three potential replacement properties. These have to be like-kind like we mentioned in our last blog. This means they must have the same nature, characteristics, or class. This requirement has some freedom since the property has to fit only one of the nature, characteristic, or class qualifications. See examples in our last blog here. And from close, you have 180 days to complete the purchase of a new property to qualify for a 100% tax deferment.
Day 45
By day 45 of the 1031 exchange timeline, you should have three like-kind properties in mind. You don’t have to choose one right now, but you do need three strong candidates. If you change your mind later and don’t choose one of the original three candidates, you’ll incur capital gains tax and void the exchange. This is why you must select your three potential properties wisely.
Here are three methods for finding strong replacement properties are:
- 3 Properties
You can choose three potential replacement properties without having to take into consideration their market value. This is related to #2
- 200% Rule
There is one exception to this rule. It’s called the 200% rule. If you cannot decide between just three properties, you can choose additional candidates. The rule is that the total value of the replacement candidates must not exceed 200% of the value of the original property you sold.
- 95% Exception
The last method is also the most confusing. When more than three properties are selected, it will not count as a replacement property was selected. BUT, this does not apply to any replacement property selected BEFORE the end of the 45-day selection period or before the end of the exchange period if the property is worth at least 95% of the market value of all the other identified replacement properties. See what I mean about confusing?
Now that you have your candidates, the remaining 135 days are meant for finalizing the purchase of the new property.
Day 180
Once you hit the 180-day mark, the transaction needs to be completed in order to qualify for 100% tax deferment. The 180 days include federal holidays and weekends, so it will be exactly 180 days. Following this timeline is a requirement to qualify and receive a 100% tax deferment. It’s also important to consult your tax professional who understands the totality of your financial picture.
If you need help planning out your 1031 exchange, we would be honored to help you through the 1031 exchange process personally. Call us today at (208) 957-0870, email us at corby@boiseturnkey.com, or fill out the form below.
