If you are the one to explore the alternative investment space, we bet you must have heard about the 1031 exchange and, more precisely, its tax benefits. According to the IRC, a 1031 exchange involves you selling your investment property and investing the entire proceeds in a new, like-kind investment property to defer the taxes on your capital gains.
But, what complicates the entire matter is the severe time crunch in the 1031 exchange timeline. And, if you are wondering what to consider during your 180-day tenure, this article might be worth reading.
Read on to explore the general dates and deadlines you must keep in mind when doing a 1031 exchange.
1031 Exchange- How Does It Work?
Before we describe more about the timeline, here’s how a 1031 exchange works.
As stated above, during a 1031 exchange, you would be required to sell your investment property (also known as relinquished property) and purchase a new investment property (also known as replacement property) using your proceeds to successfully defer the capital gains taxes.
A 1031 exchange can be done differently. Some even prefer a reverse exchange where a replacement property is purchased before selling the relinquished property. However, regardless of the type, it is imperative to follow the 1031 exchange timeline.
1031 Timeline: Dates And Deadlines
Technically, you get a total of 180 days to complete the entire process. And if we dig further, there are three key dates to keep in mind.
Day 0: Selling Your Relinquished Property
Factually, your 1031 exchange starts the day you sell your current investment property (relinquished property) and receive the proceeds in your bank account. And if you wish to pursue this 100-year-old tax benefit, you must contact a qualified intermediary (QI) to get started.
Day 45: Declaring The Replacement Properties
The moment you sell your relinquished property, you are within your 45-day ID period, where you must select up to three replacement properties within the next 45 days. Moreover, you must produce a legal document describing all three properties and submit it to your QI.
However, listing three properties doesn’t mean you have to purchase all three. You are free to go for a single property or invest in all three and diversify your portfolio. And if you are planning to invest in multiple properties, here’s what you need to consider-
- You can list up to three replacement properties, but you must have an intent to purchase at least one.
- You can invest in multiple properties as long as the aggregated value does not exceed 200% of the relinquished property’s fair market value.
- You can also identify more than three properties with an aggregated value of more than 200% of the relinquished property’s fair market value as long as you acquire 95% of the fair market value of all identified properties.
Day 180: Closing On Replacement Properties
After your 45 days of the 1031 exchange timeline ends, the remaining 135 days are provided so you can close on the replacement properties. Another thing you must note is that you get a total of 180 days to complete the 1031 exchange, and this 180-day period includes a 45-day ID period and a 135-day closing period.
In short, you get 180 days from the day you sell your property and not after your ID period ends. Therefore, it is recommended to plan ahead and keep the documentation ready.
While adhering to the 1031 exchange timeline can be a bit challenging, the 1031 exchange does come with some stunning tax benefits, allowing you to defer the capital gains taxes. Therefore, you must keep the timeline in your mind and plan things in advance to avoid any last-minute hassles.