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 1031 exchange timing rules you must meet when acquiring replacement property after your original property sells.
1031 Exchange Timing Rules
1031 Exchange 45-Day Rule
The 45-day rule starts when you close on your relinquished property:
- You have 45 days from the date you close on your relinquished property to identify up to three replacement properties and 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. The combined value cannot exceed 200% 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.
1031 Exchange 180-Day Rule
The 180-day rule also begins on the date that your relinquished property sells:
- You have 180 days (consecutive) from the date 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 for a 1031 exchange voids the exchange.
Other Aspects to Successful 1031 Exchanges
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 1031 exchange timing rules.
Midland is an experienced QI. We have two CES® team members that ensure your exchange is seamless and satisfactory. This process allows you to concentrate on and 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.