1031 Exchange 45 Day Rule - What Are the 45 Days & Why Are They So Important? - 1031 Exchange Experts Equity Advantage (2024)

FAQs

1031 Exchange 45 Day Rule - What Are the 45 Days & Why Are They So Important? - 1031 Exchange Experts Equity Advantage? ›

Properties held primarily for personal use, such as a primary residence, do not qualify for a 1031 exchange. 45-Day Rule: After closing on the sale of the relinquished property, an investor has 45 days to identify potential replacement properties in writing to a qualified intermediary.

The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is the tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.

Yes, the 45-day rule in a 1031 tax deferred exchange can be extended under specific circ*mstances. The IRS allows for an extension of the 45-day identification period in cases of natural disasters, presidentially declared disasters, or terroristic or military actions.

The 45-Day Rule for a 1031 Exchange

Identification means the investor states some potential property options but does not require them to close the sale or get the properties under contract. The identification period starts on the day the relinquished property is transferred and ends at midnight on the 45th day.

A 1031 exchange can be disqualified if the property being exchanged is not used for business or investment purposes, if the exchange is not completed within the specified timelines, or if the exchange does not meet IRS regulations.

One of the downsides of 1031 exchanges is that the tax deferral will eventually end and you'll be hit with a big bill. However, there is a way around this.

The two most common situations we encounter that are ineligible for exchange are the sale of a primary residence and “flippers.” Both are excluded for the same reason: In order to be eligible for a 1031 exchange, the relinquished property must have been held for productivity in a trade or business or for investment.

Missing Deadlines

They have 180 days to acquire replacement properties, but that deadline also starts ticking away with the closing on relinquished properties. If an investor misses either deadline, it will invalidate the 1031 exchange.

You cannot receive an extension on the 45-day or 180-day timelines. If you fail to properly identify or close on your replacement property within the required timeframes, your 1031 will not be valid.

Since this would require payment for the property, it also means that funds may not remain in the exchange account after the 180^th day.

How long after a 1031 exchange can you sell? ›

If a property has been acquired through a 1031 Exchange and is later converted into a primary residence, it is necessary to hold the property for no less than five years or the sale will be fully taxable.

The 95% rule says that a taxpayer can identify more than three properties with a total value that is more than 200% of the value of the relinquished property, but only if the taxpayer acquires at least 95% of the value of the properties that he identifies.

Section 1031(f) provides that if a Taxpayer exchanges with a related party then the party who acquired the property in the exchange must hold it for 2 years or the exchange will be disallowed.

President Biden has released his proposed budget for 2024, which again looks to eliminate 1031 like-kind exchanges.

For purposes of a Section 1031 exchange, a disqualified person is someone who is considered an agent of the taxpayer at the time of the exchange. Family members, or related persons, of a disqualified person are also disqualified.

To qualify for 100% tax deferment, the net market value of the exchange property you're purchasing can't be of a lesser value compared to the relinquished property you've sold.

A 1031 Exchange affords you the opportunity to preserve your equity, keep the proceeds you would have set aside to pay taxes and instead deploy the funds to the purchase of new real estate with greater potential. Keep your equity working for you.

Typical DST Returns on a 1031 exchange investment could yield between 5%- 8% of monthly distributions based on your fractional interest.

Overall, 1031 Exchanges are a great option for smart investors looking to make the most of every investment property in their portfolios. As the buyer of a new property, whether one property or multiple properties, you have the opportunity to save significantly on deferred taxes.

A 1031 Exchange allows you to delay paying your taxes. It doesn't eliminate your capital gains tax. Only if you never sell your 1031 exchanged property or keep on doing a 1031 exchange, will you never incur a tax liability.