Understanding the Timing Requirements for Closing & Identifying Replacement Property in a 1031 Exchange

1031 exchange is a “like-kind” exchange of property that allows property managers and investors to defer their capital gains tax. Generally, when you sell an investment property, you would have to pay capital gains tax on the profit you made on that property. However, when you perform a 1031 exchange, you can defer paying capital gains tax until you sell a property without a 1031 exchange. To qualify for a 1031 exchange, you must abide by strict Internal Revenue Service guidelines.

What Is a Qualified Intermediary?

In a 1031 exchange, a qualified intermediary is required to ensure everyone remains compliant with the exchange process. A qualified intermediary is a third-party fiduciary who holds money or assets for another person. A qualified intermediary will help perform the following duties:

  • Obtain the relinquished property
  • Transfer the relinquished property to the buyer
  • Obtain the replacement property from the seller
  • Transfer the replacement property to you
  • Handle the deposits and disbursements
  • Manage the closings
  • Verify that the IRS’s guidelines are followed

In each 1031 exchange, a qualified intermediary is required to help investors follow the strict requirements of the “like-kind” exchange.

Exchange Period Deadline

Once you sell your property, your 180-day exchange window begins to run. This means that you must close on your replacement property within 180 days of selling your property or by the Federal tax return due date for the year the property was sold. For example, if you sell your property in December, you will have less than 180 days to close on your replacement property because you only have until the Federal tax return filing deadline. If you fail to sell your property by the tax return deadline, you may be disqualified from using a 1031 exchange.

Sometimes, you may want to file for an extension for filing your taxes, so you have enough time to find and buy a replacement property.

Identification Deadline

Once you sell your property, a 45-day replacement property identification window begins. The identification window means you have 45 days to choose up to three replacement properties from selling your property. Therefore, you should have an idea of the properties you will be looking at before relinquishing your property to the qualified intermediary for transfer.

There are also restrictions on identifying properties. Under a 1031 exchange, you are usually only allowed to choose three properties unless you replace your relinquished property with a portfolio of properties. If you identify three properties and then end up purchasing a property that is not on that list, you could be disqualified from the 1031 exchange and required to pay capital gains taxes on your relinquished property.

Two methods can be used to complete the replacement property identification process. First, you can complete the purchase of your replacement property before the identification deadline expires. Second, you can deliver a written identification notice to your qualified intermediary by midnight of the 45th day.

Contact Brazos1031 Exchange Company Today

Understanding the 1031 exchange process before relinquishing your property can save you time and money. Contact us for guidance so you can accomplish your goals without stress or unnecessary snags.  Simply call(888) 508-1901 to schedule a consultation.

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It is easy to get started on your exchange. You can either call our office directly at 888-508-1901, or you can fill out our Start Your Exchange form.
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