1031 Rules and Timeline​

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Rules and Key Points:

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A 1031 Exchange allows investors to defer federal capital gains tax, state ordinary income tax, net investment income tax, and depreciation recapture on the sale of investment property, provided specific criteria are met, including:

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Purchasing Replacement Property of equal or greater value than the property sold, and reinvesting all proceeds.

Identifying Replacement Property within 45 days of the sale's closing.

Completing the purchase of the Replacement Property within 180 days of the sale's closing.

Both properties must be considered 'like-kind.'

The sale proceeds must be held by a Qualified Intermediary (QI), a third-party who ensures compliance with IRS regulations. (See below for the definition of a Qualified Intermediary.)

The Replacement Property must be of equal or greater value to avoid paying "Boot." If the new property is worth less than the original, the exchange remains valid, but taxes may be owed on the unused capital gains.

No cash or non-like-kind property can be received during the exchange.

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Exchangers have the flexibility to identify multiple or alternative Replacement Properties using different rules:

• Three Property Rule: The Exchanger may identify up to three properties as potential Replacement Properties, regardless of their fair market value.

• 200% Rule: The Exchanger may identify any number of properties, as long as the total fair market value (at the end of the Identification Period) of all identified properties does not exceed 200% of the total fair market value of the Relinquished Properties.

• 95% Exception: If the Exchanger identifies more properties than allowed under the Three Property or 200% Rules, the Exchanger will be considered as having identified no Replacement Properties, unless they acquire Replacement Property worth at least 95% of the total fair market value of all identified properties by the end of the Exchange Period. The fair market value of the identified Replacement Property is determined based on the earlier of when the Exchanger receives the property or the last day of the Exchange Period.

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Keep in mind, capital gains taxes are deferred, not eliminated. Eventually, you will owe taxes when you sell the Replacement Property without executing another exchange

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1031 Timeline

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There are two critical deadlines the Exchanger must meet for a valid exchange (also referred to as a Delayed, Like-Kind, or Starker Exchange). The 1031 Exchange timeline starts with the closing of the Relinquished Property, followed by a strict 45-day Identification Period during which the investor must identify potential Replacement Properties.

 

The exchange must then be completed within 180 days from the closing of the original property, including the closing of the new property. In certain cases, this timeframe may be shorter. Meeting these deadlines is essential to preserve the tax-deferred status of the exchange, as missing them could lead to disqualification and substantial tax liabilities.

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45-Day Identification Period:
Investors have 45 calendar days from the sale of the Relinquished Property to identify potential Replacement Properties. The Identification Period begins the day the ownership benefits and burdens of the Relinquished Property are transferred to the buyer.

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180-Day Rule:
The exchange must be completed within 180 calendar days from the date the Relinquished Property is transferred. This means all Replacement Property must be closed within this 180-day window, roughly six months. In some cases, this deadline may be shorter.

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Both the 45-day Identification Period and the 180-day Exchange Period are strict and cannot be extended, even if they fall on a weekend or holiday. However, an extension of up to 120 days may be granted if the Exchanger qualifies for a disaster extension under Rev. Proc. 2007-56.

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FORWARD vs REVERSE 1031 Timeline

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FORWARD 1031:   

Execute Exchange Agreement (EA) before Close of Escrow (COE) of relinquished property

45 days from COE of relinquished property to identify 3 replacement property

180 days to complete COE of all replacement property 

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REVERSE 1031: 

Execute Qualified Exchange Accommodation Agreement (QEAA) before COE of replacement property   

Assign replacement property to Exchange Accommodation Titleholder (EAT) before COE of replacement property   

Execute Lease Agreement from EAT for business activities on replacement property

45 days from COE of replacement property to identify 3 relinquishable Property

180 days to complete COE of all relinquished property and transfer of title of replacement property or 100% share of EAT to Exchanger.

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