About a 1031 Exchange Timeline
1031 exchanges offer a myriad of benefits to those who take advantage of them, but those benefits are not without strings attached. First, there are strict limits on the types and values of properties for which 1031 exchanges may be used. And second, there is a strict timeline for 1031 transactions. Failure to adhere to that timeline can result in the loss of the tax benefits associated with 1031 exchanges, which can be a significant financial setback for taxpayers who begin the process but fail to complete it in time. To reap the full benefits of 1031 exchanges, it is essential for taxpayers to understand how the 1031 timeline exchange works and to work with a professional 1031 exchange company.
Before Beginning: Choose a Qualified Intermediary
Most types of 1031 exchanges must be facilitated through a qualified intermediary. The qualified intermediary’s role is to receive the proceeds of the sale of the relinquished property, hold those proceeds until you find replacement properties, and then release those funds to purchase the replacement property. You should choose a qualified intermediary at a 1031 exchange company as soon as you decide that you want to take advantage of a 1031 exchange.
Day 1: Sale of Relinquished Property
The first step of the 1031 exchange timeline is to sell your property — i.e., the “relinquished property.” This begins the 1031 exchange timeline. From here, you have 180 days to complete the process (although there are a few ways to broaden this window that your qualified intermediary can discuss with you).
Day 45: Selection of Replacement Properties
The second step of the 1031 exchange timeline is to select replacement properties for your relinquished property. There are three requirements to keep in mind when choosing replacement properties. The properties you choose must:
- Be of equal or greater value to the property you relinquished
- Be property of “like kind” (e.g., farmland for farmland, commercial office building for retail property, condominium building for apartment building, etc.)
- Be for productive use in a trade or business or for investment (this generally excludes primary residences)
There are also rules that limit the number of properties that the taxpayer may identify. The properties the taxpayer chooses must meet one of the following criteria:
- Three-property rule: The taxpayer may identify up to three potential replacement properties without regard to their fair market value
- 200% rule: The taxpayer may identify more than three potential replacement properties is their aggregate fair market value does not exceed 200% of the value of the relinquished property
- 95% exception: The taxpayer may identify as many properties as they want, but before the end of the exchange period, the taxpayer must select a replacement property with an aggregate fair market value of at least 95% of the aggregate fair market value of all of the other identified properties
Once the taxpayer has identified potential replacement properties, they may formally identify them by either (1) completing the purchase of the replacement property before the end of the 45-day selection period or (2) delivering written notice to their qualified intermediary before the end of the 45-day selection period.
Days 46-180: Purchase of Replacement Property
The third step of the 1031 exchange timeline is to complete the purchase of the replacement property. If the taxpayer already completed the purchase using Method 1 of the identification above (i.e., purchasing the property within the 45-day window), the timeline ends when the property is purchased. If not, the taxpayer has until Day 180 to complete the transaction. Keep in mind that the 180-day period includes weekends and holidays.
Exception to the 180-Day Timeline: Tax Day
The general rule of 1031 exchanges is that the taxpayer has 180 days to complete the transaction. However, an exception exists if the 180-day due date is after the due date of the taxpayer’s return for the taxable year in which the relinquished property is transferred. In that case, the due date is the earlier date. For example, assume the taxpayer’s tax return due date is April 15. If the end of the 180-day exchange period is May 15, the taxpayer will have only 150 days to complete the transaction. Taxpayers can circumvent this exception by requesting an extension to file their tax return.
Get Started on Your 1031 Exchange With Help From a 1031 Exchange Company
The timeline for 1031 exchanges is strict, and there are few exceptions to it. To make sure that you do not miss any due dates, you should work with a qualified intermediary from a professional 1031 exchange company. To get started, please contact 1031 National Services by calling 888-872-1031 or using our online contact form.