Delayed 1031 Exchanges

A delayed 1031 exchange, also called a “forward 1031 exchange,” is a process where a property owner sells their current real estate asset, known as the “relinquished” property, before acquiring a “replacement” property. A qualified intermediary (Q1) is used to oversee and facilitate the 1031 delayed exchange process. In a delayed 1031 exchange, the proceeds go to the QI, who holds it before directing it to purchase the replacement property.

Unlike a simultaneous 1031 exchange, in a delayed 1031 exchange, the old or relinquished property is sold and closed before the new or replacement property is purchased and closed. This allows real estate investors to defer federal and state capital gains and recapture the depreciation tax triggered when the relinquished property is sold and replaced with a property of equal or greater value. The interest-free loan can be used towards buying the replacement property.

There are strict timelines involved with delayed 1031 exchanges, which gives investors:

• Forty-five days from the date they sell their relinquished property to identify a replacement property.
• One hundred eighty days from selling their relinquished property to close on their replacement property.

An identification form is provided by the QI, along with a letter identifying the 45th and 180th calendar day of the delayed 1031 exchange. It is essential that all 1031 exchange documents are prepared prior to the closing of the relinquished property. Rules provided by the IRS do not allow property owners to set up a delayed 1031 exchange after the relinquished property has closed. It is important to select a reliable QI and other tax and legal professionals to ensure that all rules are followed for a successful delayed 1031 exchange.