Decoding 1031 Exchange Timeline and Rules

A 1031 exchange is a transaction that lets you exchange one real estate investment property for another while deferring capital gains taxes. Real estate agents, title companies, investors, and others use the term, which is derived from Section 1031 of the Internal Revenue Code (IRC). Section 1031 of the Internal Revenue Code allows you to carry over the gain from the sale of your Old Property to the purchase of your New Property and avoid paying capital gains taxes.

Here’s all you need to know about the 1031 delayed exchange time limit and other rules you have to follow for an exchange transaction. 

1031 Exchange Timelines and Rules

An exchange is traditionally defined as a simple swap of one property for another between two people. But it’s unlikely that you’ll come across someone who both has and wants the exact property you’re looking for. As a result, the vast majority of exchanges are delayed, three-party, or Starker transactions.

A qualified intermediary (middleman) is required in a delayed exchange, who holds the cash after you sell your property and uses it to purchase the replacement property for you. This three-party transaction is referred to as a swap.

In a delayed exchange, there are two important timing rules to follow. 

1031 Exchange 45-Day Rule

The first is about designating a replacement property. The intermediary will receive the cash when your property is sold. You cannot accept the cash because it will jeopardize the 1031 treatment. In addition, you must designate the replacement property in writing to the intermediary within 45 days of the sale of your property, specifying the property that you want to acquire.

According to the IRS, you can designate three properties as long as one of them is eventually closed on. If they pass certain valuation tests, you may even choose more than three.

1031 Exchange 45-Day Rule

In delayed exchange, the second timing guideline concerns closing. The new property must be closed within 180 days of the sale of the old property.

The two time frames overlap, so you begin keeping track of them as soon as your property is sold and the deal is final. If you choose a replacement property exactly 45 days later, you’ll only have 135 days to close.

Reverse Exchange

It is also possible to qualify for a 1031 exchange by purchasing the replacement property before selling the old one. The same 45- and 180-day time frames apply in this case.

To be eligible, you must transfer the new property to the titleholder of an exchange accommodation, choose a property to exchange within 45 days, and finalize the exchange within 180 days of purchasing the replacement property.

Extension of Time Limit

If you find a property you want to buy before you find a buyer for the property you own, it is acceptable to make an offer before the closing of your relinquished property. Many investors in this situation make the purchase contingent on the sale of their current property. The exchange works and is considered a delayed exchange as long as the closing on the replacement property occurs after the closing on the relinquished property (which could be as little as a few minutes).

However, if you find a property that you must have and must close on before finding a buyer for your relinquished property, you can acquire it through a Reverse Exchange. While the Reverse Exchange approach is significantly more expensive, many investors prefer it because they know they will get exactly what they want today while selling their relinquished property in the future.

You can visit the Granite Exchange Services and take a look at 1031 Exchange Timelines Calculator & Rules. Granite is the most reliable full-service 1031 Exchange Intermediary in the US. Get in touch today!