They say that real estate success is all about location, location, location. However, it could be argued that it is also about timing, timing, timing. For example, finding a great investment property is about location but also about timing. Timing is also important in a §1031 Exchange. In order to defer the capital gain taxes on the sale of one property and purchase of another, a §1031 Exchange must be set up before both the Relinquished Property and the Replacement Property close. After either property closes will be too late. So it is important to understand the timing and follow the deadlines.
From the date of closing on the Relinquished Property, the investor has 45 days to identify potential Replacement Property(ies) and a maximum of 180 days from the closing of the Relinquished Property to acquire the Replacement Property(ies). The investor must identify the Replacement property prior to midnight on the 45th day. The investor must acquire one or more of the identified Replacement Properties within a maximum of 180 days.
It is important to note that the Replacement Property must be purchased before the Investor files their tax return for the year in which the §1031 Exchange began. This means if the §1031 Exchange begins late in the year, typically October 19-December 31 for an individual taxpayer, the Exchange will either:
- need to be completed before the Investor’s tax filing deadline (typically April 15), or
- need the Investor to file for an extension of time to file his/her tax return in order to have the full 180 days to complete the §1031 Exchange.
Finally, the same rules apply in a Reverse Exchange, where the Replacement Property closes first, except it is the Relinquished Property that must be identified in 45 days and close within 180 days.
If you need guidance on your particular situation, call the experts at Madison 1031 – a Qualified Intermediary (QI) — to discuss whether a §1031 Exchange makes sense for your real property.
