When deferring capital gain with a 1031 exchange there is a fairly strict timeline involved. The basics are:
- Step 1 – Decide if a 1031 exchange is right for you. If you are contemplating selling your investment property but hesitate due to the capital gains taxes, a 1031 exchange may be the right fit
- Step 2 – Sell your current investment property. In most cases you’ll want to sell your property first. Once the property is sold the proceeds will be held by an intermediary or exchange accomodator.
- Step 3 – Identify the replacement property. This can be any “like kind” property and does not need to be identical or in the same state
- Step 4 – Purchase the replacement property – The purchase process is fairly standard by the funds will be provided by the “accomodator” that is holding the proceeds from the sale of your property.
1031 Exchange Timeline
From the day you close escrow on the sale of your current investment property, the calendar starts on your 1031 exchange timeline. You have 45 calendar days to identify a possible replacement and 180 calendar days to close escrow on the replacement property. The IRS is very strict on these timelines and missing these timelines can mean paying capital gains on the sold property.
Rules for Identifying the Replacement Property
- 3 property rule – You can identify up to 3 possible replacement properties by day 45 and complete the exchange by purchasing any or all of them (even if more than the value of your sold property) OR
- 200% rule – You can identify more than 3 replacement properties and purchase any or all of them as long as total value doesn’t exceed 200% of the sold property OR
- 95% rule – If neither above works, you can identify any number of replacement properties regardless of total value as long as you purchase 95% of the total value of all the properties identified.
The above information is based on items from the IRS website and may be subject to change at any time. The information is for general knowledge only and we advise to check with the IRS website or your accountant for updated information.