The process of selling a property and replacing it with a similar property to defer capital gains taxation is referred to as a 1031 exchange, and it’s used by commercial investors and individual investors alike. But the tight deadlines associated with a like-kind exchange can be difficult to maneuver, especially for brand new real estate investors. That’s why you’ll need to understand the deadlines and develop a plan to keep you on track. Here are four tips that can help you meet the deadlines of a like-kind exchange.
#1 Understand the Deadlines
Every real estate investor must understand the timeline of a like-kind exchange before kicking off the process. The key dates are 45 days and 180 days after the first property sale.
- 45 days after closing the sale on the relinquished property, you must identify up to three replacement properties and submit the information to your qualified intermediary by midnight on the 45th calendar day.
- 180 days after closing the sale on the relinquished property, the like-kind exchange transaction must be completed. (Note that if you sell a property in the final months of the year, you’ll need to complete the transaction by the due date of your tax return for that year, including extensions.)
Failure to fall within these deadlines could result in the transaction being marked as a taxable sale instead of the tax-favored position of a like-kind exchange.
#2 Find a Qualified Intermediary to Facilitate the Transaction
Once a property’s title has been exchanged or the seller receives proceeds from the sale, executing a 1031 exchange is off the table. Identifying a qualified intermediary (QI) in advance of listing the property you want to sell is the best way to adhere to IRS regulations.
#3 Begin Looking for Replacement Properties in Advance of the Sale
Especially in a tight real estate market, finding suitable replacement properties to purchase can be the most challenging part of a 1031 exchange. For this reason, you may benefit from scoping out eligible properties before the sale of the relinquished property goes through. Doing so gives you time to solidify the property’s desired location and understand market rates to determine what size property (or properties) you may be able to purchase.
#4 Create a Plan
Knowing the deadlines for a 1031 exchange is great, but you may benefit from creating a plan to help you remember and stick with these deadlines. Mark key dates on your calendar and set reminders well in advance to help be sure you don’t miss a deadline. It may also help to have a business partner, spouse, or friend help keep you accountable by sharing 1031 exchange deadlines with them too.
The Bottom Line
A 1031 exchange can help investors level up into more expensive and hopefully lucrative properties. But meeting the deadlines is key to ensuring the property exchange receives tax-deferred treatment. When in doubt, consult with a qualified intermediary, attorney, or realtor who can review the provisions of a like-kind exchange and help you stay on track throughout the process.
