Deadlines in a 1031 Exchange: The Identification and Closing Periods
Conducting a like-kind exchange under Section 1031 of the Internal Revenue Code (IRC) can significantly reduce your tax bill. However, strict rules apply, and failing to comply with these rules can result in denial of like-kind exchange treatment. This means that you could end up paying taxes on the sale of your property unnecessarily—and this could significantly undermine the value of your investment.
Among other rules, 1031 exchanges are subject to two key deadlines. You must meet both of these deadlines in order to secure the tax benefits of a like-kind exchange under Section 1031. This makes working with an experienced 1031 exchange facilitator extremely important.
The Two Key Deadlines for 1031 Exchanges Involving Like-Kind Properties
The deadlines that apply to 1031 exchanges apply at different stages of the process. Knowing what triggers each deadline—and knowing what you need to do in order to meet each deadline—is critical for ensuring that you receive the tax benefits that are available.
1. The Identification Deadline
The first 1031 exchange deadline is the identification deadline. Under Section 1031, you only have a limited amount of time to formally identify the property that you intend to purchase to replace the property that you are selling.
The identification deadline is 45 days from the date that you sell your relinquished property. This deadline appears in Section 1031(a)(3)(A):
“For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if— (A) such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange . . . .”
To formally identify a replacement property by the 45-day deadline, you must provide written identification of the replacement property to an appropriate third party—usually your qualified intermediary. Even if you have identified the property you intend to purchase, if you do not provide written notice within 45 days of selling your relinquished property, you won’t be able to complete a tax-deferred like-kind exchange.
2. The Closing Deadline
The second 1031 exchange deadline is the closing exchange. In addition to formally identifying a replacement property within 45 days of selling your relinquished property, you must also receive the replacement property within 180 days of selling your relinquished property. This deadline appears in Section 1031(a)(3)(B):
“For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if— . . . (B) such property is received after . . . the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange . . . .”
While there is an exception that requires an earlier closing in some circumstances, this exception rarely applies. Even so, to ensure that you are able to secure the tax benefits of conducting a like-kind exchange, it is a good idea to discuss your plans with your 1031 exchange facilitator before moving forward.
Tips for Meeting the Identification and Closing Deadlines When Conducting a Like-Kind Exchange
Since missing these deadlines isn’t an option, it is important to make sure that you are prepared to meet them. Here are some tips to help you successfully complete your like-kind exchange:
- If possible, informally identify your replacement property before selling your relinquished property.
- Do your due diligence on the replacement property in advance of selling your relinquished property so that you don’t find yourself needing to quickly find another property before the 45-day identification deadline expires.
- If you will be financing any portion of the purchase of your replacement property, get prequalified with your lender so that you don’t find yourself unable to meet the 180-day closing deadline.
- Work with an experienced 1031 exchange facilitator who can guide you through both transactions while helping ensure that you meet both deadlines.
- Talk to your 1031 exchange facilitator about conducting a delayed exchange if necessary.
Discuss Your Plans with a 1031 Exchange Facilitator for Free
If you are preparing to conduct a like-kind exchange, it is important to make sure you are fully ready to meet the deadlines that apply. We are here to guide you through the process, and we are more than happy to answer any questions you may have. To speak with an experienced 1031 exchange facilitator for free, call 888-530-7449 or tell us how we can get in touch online today.