1031 Exchange Time Limit: How to Meet Every Deadline

Understanding the 1031 exchange time limits is critical. The Internal Revenue Service (IRS) sets crucial deadlines for these complex transactions. If you miss even one, you could face consequences, including an unexpected tax bill.

In this article, we’ll explain the three main deadlines involved with a 1031 exchange and offer tips for staying on schedule.

What Is a 1031 Exchange?

A 1031 exchange is a real estate transaction involving two commercial properties. One is sold, and the taxes that sale should trigger are rolled into the basis of the one that was purchased.

As the IRS explains, taxes deferred in an exchange are deferred but not forgiven. If you sell the property you purchase via an exchange, those deferred fees could come into play.

Investors use 1031 exchanges to help them unload underperforming properties, invest in new markets, and more. When done properly, these transactions can deliver big profits for the savvy investor. Meeting deadlines is an important part of handling an exchange effectively.

How to Meet 3 Key 1031 Exchange Time Limits

The IRS explains that time limits associated with a 1031 exchange can’t be extended or altered unless there’s a presidentially declared disaster. In other words, it’s critical to keep an eye on the calendar when you begin this process. Here’s what you need to know about each deadline.

1. Identify a Replacement Property

Your first deadline involves formally identifying the property you want to buy as part of the exchange. According to the IRS, you have 45 days from the sale to formally identify potential properties you will buy. That identification must be in writing, signed, and delivered to a person involved with the exchange process. That could be the seller of your replacement property or your qualified intermediary (more about qualified intermediaries below).

Your document must include a legal description of the property. That can consist of a street address or formal name. It should also include language from the assessor that outlines where the property is and how big it is.

In states like Colorado, legal descriptions can be condensed. That means the language you put on your document may seem like gibberish to you. However, the authorities can typically decode these notes and determine where the property is.

The realtor involved with the sale of the property should provide a legal identification. If no realtor is involved, you’ll need to go to the assessor to get this language. Remember that you only have 45 days to get it. Miss this deadline, and the transaction can’t continue as is.

2. Buy a Property

Per IRS rules, you only have 180 days from the sale of the property to complete the purchase of the replacement version. At that point, the deed for the asset should have your name on it, and you should be in full control of it.

Meeting this deadline isn’t always easy. As commercial real estate professionals explain, a typical commercial property transfer can take between 75 and 90 days. If you spend too long searching for just the right fit, you could come very close to missing this deadline. As a result, you might be required to pay too much for a property just to keep things moving.

3. File Your Taxes

Since your taxes aren’t forgiven, you must tell the IRS about the transaction through formal paperwork. When you file your taxes during that tax year, you must provide specific paperwork about the transaction. Form 8824 includes questions about the properties bought and sold, dates of the transactions, and the values involved.

If you don’t file this document during the proper tax year (or at all), you could face an audit and associated fines.

Who Can Help You Meet 1031 Exchange Time Limits?

Since meeting the 1031 exchange time limits is so critical, don’t take on this obligation without help. Bringing the following people onto your team could be a smart investment strategy:

Qualified Intermediary

A qualified intermediary (QI) is a required part of your 1031 exchange process. This person or organization will accept your funds from the sale and hold them legally until the sale is completed. Since your QI holds the funds (not you), the event isn’t taxable.

A QI can accept your written notification at the 45-day mark and ensure you’ve identified a property to purchase. This is a critical part of your team.

Realtor

There are 1.5 million professionals who are members of the National Association of Realtors. These people may help you to identify a property to buy and push the process through as quickly as possible. A realtor can also help to provide the legal description of property, so you can put it on your written description at the 45-day mark.

Accountant

There are more than 1.4 million accountants at work in the United States. These professionals could help you to complete tax forms properly, including helping to calculate the basis in your new property and any deferred taxes.

Work With Experts

At 1031 Pros, we specialize in working as qualified intermediaries for investors both large and small. Our experienced professionals can set up secure accounts to hold your funds, and we can provide all the paperwork you need for a smooth purchase. We’ve helped thousands of people just like you with these complex transactions. Contact us to find out more about how we can help you today.