The 1031 exchange process can be complex, and failure to comply with the stringent requirements set forth by the Internal Revenue Service (IRS) can result in disqualification of tax deferral and other benefits. A common challenge during the 1031 exchange process involves strict adherence to the time constraints provided by the IRS. While some timelines are clearly established, the rules regarding the holding period for a 1031 exchange are a bit murky, making it common for questions to arise.
The following timeline is required for a successful 1031 exchange:
- The replacement property must be identified within 45 days of the sale of the original property.
- The replacement property must be acquired within 180 days of the sale of the original property.
- The qualified intermediary (QI) must hold the proceeds from the sale of the original property until they are used to purchase the replacement property.
It is important for investors working with multiple properties to be aware that the timeline is triggered with the first closing and as soon as the first asset is transferred. Due to the fact that changes often arise in investment projects, the 45-day timeline for identification of the replacement property can be challenging for many real estate investors.
Also important to note is the 180-day window starts running at the same time as the 45-day identification time period, and each day is counted from the date of closing on the original property, including holidays and weekends. Unsuccessful exchanges and unwanted capital gains income are unfortunate consequences when there is a failure to complete the 1031 exchange process within the timelines set forth by the IRS.
How Long Do I Have to Hold the Replacement Property in a 1031 Exchange?
The IRS does not provide a finite time period that is required for a replacement property to automatically qualify as an asset being held for investment. There are factors beyond time that the IRS considers in determining an investor’s intent for both the relinquished and replacement properties.
Anytime a 1031 exchange has reason to be called into question, the IRS may look at all the facts and circumstances of an investor’s particular situation to determine their true intent for both properties involved in the 1031 exchange. Therefore, it is a good idea for an investor to have a variety of ways to support their claims of intent to hold a property for investment purposes.
How Can an Intermediary Help With a 1031 Exchange?
When a real estate investor works with an experienced intermediary, it greatly reduces their risks and the likelihood of disqualification during an exchange. An intermediary can help with the following:
- Staying on top of the investor’s timeline.
- Making sure that the investor satisfies the identification rules and understands the 45-day and 180-day deadlines.
- Keeping in communication with the investor and any agents, particularly with regard to all time constraints.
- Discussing the investor’s ultimate investments goals.
- Determining optimal timing for filing tax returns.
1031 Federal Exchange Provides Reliable 1031 Exchange Services for Investors
1031 Federal Exchange provides comprehensive 1031 exchange services for our clients. Call us at 513-450-3039 or contact us online to schedule a free consultation and to learn more about how we can help you with your 1031 exchange. Located in Loveland, Ohio, we serve clients nationwide.