A 1031 exchange is a fantastic real estate investing maneuver. Exchanges 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 meet when identifying and closing on 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 closing on your relinquished property to identify up to three replacement properties and to send that information to your qualified intermediary.
- If you only identify three properties, their purchase price can be any value. Note: You can identify more than three properties. Their combined value cannot exceed 200 percent of the relinquished property’s sale price. This rule only applies when you identify more than three properties for exchange.
- If you are unable to identify replacement properties within 45 days, 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 your relinquished property sells to close on one or more of the properties you identified for exchange.
- 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. The use of a Certified Exchange Specialist® (CES®) is highly recommended. These professionals ensure your transactions comply with the IRS and fall within the timing rules of 1031 exchanges.
Midland is an experienced QI. We have two CES® team members that ensure your exchange is completed seamlessly and satisfactorily. This process allows you to concentrate on and to continue building investment income on real estate assets.
Find detailed information on exchange qualifications in this IRS publication.
For information regarding real estate investments within an IRA or other retirement account, contact Midland Trust at 239-333-1032 or visit www.midlandtrust.com.
Editor’s note: This blog was originally published in May 2016 and has been updated for accuracy and comprehensiveness.