The 1031 Exchange Timeline: Deadlines, Identification Rules and Expert Answers

At a JTC webinar, industry veterans explained the nuances of 1031 exchange deadlines and identification rules, knowledge that can mean the difference between a successful exchange and an unexpected tax bill.

IRC Section 1031 allows property owners to defer capital gains and other taxes on the sale of business or investment property when the proceeds are reinvested in a like-kind property. For more than 100 years, taxpayers have used like-kind exchanges to build wealth through property ownership. Section 1031 can be employed to grow small businesses, diversify into new kinds of real estate, save for retirement, or even leave tax-free inheritance by continuing to exchange for the rest of your life.

While some people and businesses use 1031 repeatedly in order to expand their portfolios and upgrade their property holdings, most exchangers don’t pursue numerous exchanges. Many property owners have held the same rental property for decades, only selling once they’re ready to part with a business, move to a new area, or transition to passive ownership. Less-experienced exchangers can easily get tripped up by Section 1031’s complicated rules, especially those related to how long you actually have to complete a 1031 exchange.

At a JTC webinar, our panel addressed some of the questions they hear most frequently related to property identification, the 1031 exchange timeline, and how to avoid running afoul of the rules.

When does the 1031 exchange timeline begin?

Every 1031 exchange must adhere to the 1031 exchange timeline, which has two key dates: Day 45, by which the exchanger must identify at least one potential replacement property, and Day 180, by which the exchanger must acquire a replacement property, and after which any leftover exchange funds are returned as boot.

These are the rules for a typical forward exchange; but what about in a reverse 1031 exchange, where the replacement property is acquired first? Do the same rules apply? The answer is yes, with the difference being that it’s the relinquished properties that must be identified on or before Day 45.

“In a reverse exchange, does the whole deal have to be done in 180 days? And again, the answer is yes, if you’re complying with the Safe Harbor,” said Nicholas Scarfone of Barclay Damon LLP.

Safe Harbor rules are key to reverse exchanges, as they provide taxpayers with guidelines for how to execute a reverse 1031 exchange that complies with 1031 rules. It’s possible to execute an exchange outside of the Safe Harbor rules, but there’s no guarantee it will be allowed. “You sort of roll the dice,” said Scarfone.

There are some situations where the 1031 exchange timeline is altered, such as when natural disasters occur. And if you sell your property less than 180 days from the date your federal income tax return is due, you’ll only have until that date to complete your exchange, rather than the full 180 days, unless you apply for an extension.

“There are defined dates and times that you must adhere to, to successfully complete the transaction,” said JTC Senior National Sales Manager Justin Amos.

A common question JTC’s team hears about forward exchanges is this: just when does that ticking clock start? When is Day 0 of the exchange? The answer is the date when the relinquished property sale closes escrow. From that point, you have 45 days to identify and 180 to acquire. And if Day 45 or Day 180 falls on a weekend or holiday?

“This is calendar days, not business days” said JTC Certified Exchange Specialist® Nicole Vella. “The IRS doesn’t care if it falls on Christmas.”

The 1031 exchange 45-day rule: how to use your identification window

45 days isn’t a long time, but as the panelists explained, there are things you can do to make it more likely that you’ll be successful. For starters, you can start your search for a replacement property before you sell your relinquished property. That way, when Day 0 hits, you’ll already have some potential properties lined up.

“We do encourage you to look for replacement properties even prior to selling your relinquished property, because that will inevitably help you in your timeline,” said Vella.

Once you have some properties in mind, you should go ahead and identify them in writing, because there’s no penalty for doing so early. You won’t be bound to those properties if something else comes along before Day 45.

“If you do identify within that 45-day period, you are eligible to make changes within that 45-day period. But as soon as Day 46 hits, you are locked into those properties that you have identified,” said Vella. “If, by chance, you can’t close on any of those, you still have to wait until Day 180 to receive your funds back on Day 181.”

One of the best ways to avoid the confusion around the identification deadline and its rules is to complete your transaction before Day 45. If you do, you won’t have to perform the identification step at all.

“If you close on any properties prior to Day 45, you don’t necessarily have to submit the identification form signed by you, because they’ll be deemed identified by contract,” said Vella who added that “personally, I do recommend still filling out the form so you have a paper trail further on if your CPA needs it.”

Who must receive written notice of your identified 1031 replacement properties?

A webinar attendee asked another common question about the identification process: who needs to be notified in writing?

As we’ve mentioned in a previous post, you should let everyone involved in the transaction receive a copy. That includes your qualified intermediary (QI) and the owners of the identified replacement properties. Your agreement with them will need to have a clause that indicates the property is being acquired as part of the exchange. You’ll need a similar agreement with the buyer of the relinquished property, which is why it’s a good idea to retain a QI and talk with your advisors before you sell your relinquished property.

How many properties can you identify? It’s not an unlimited amount, but you do have some flexibility. There are actually three 1031 identification rules governing property identification, and you can follow any of the three, whichever fits your situation.

The three 1031 identification rules: which one should you use?

The three-property rule states that you can identify up to three properties of any value. The 200% rule says you can identify more than three, provided their total value does not exceed 200% of the value of the relinquished property. The 95% rule says you can identify any number of any value, but must acquire at least 95% of the aggregate fair market value of the identified properties.

The 95% rule is rarely used, so most exchangers are likely deciding between the three-property and 200% rules. Vella said that in her experience, most exchangers opt for the three-property rule because it allows for flexibility in the value of the properties.

“I find the majority of our clients do lean more towards the three property rule, mostly because it’s also the easier of the two to follow,” she said. “You want to give yourself some more flexibility in sales prices, the three property rule tends to be where more people lean.”

For those who want to diversify across a number of smaller properties, the 200% rule is available. It allows exchangers to select any number of properties, with the only limit being the aggregate value.

“If you’re considering four or more, definitely pay attention to the sales prices,” said Vella. Those exchanging one-for-one will probably want to use the three-property rule, as it will allow them to identify three properties, each being valued close to the value of the relinquished property. But the 200% rule is an option you should be aware of if diversification is your goal.

The Three 1031 Identification Rules: A Quick Comparison

Work with an experience 1031 exchange qualified intermediary

One thing that was clear at the webinar was that this was far from the first time our panelists had addressed these questions. JTC’s team has decades of experience facilitating all types of 1031 exchanges, including reverse 1031 exchanges, improvement exchanges, DSTs, multi-property exchanges, and everything in between.

Whether you’re a large company or a first-time exchanger with a single property, you’ll receive access to our Exchange Manager portal that provides 24/7 access to exchange information, as well as our institutional-grade security measures. And because we provide a dedicated qualified intermediary team and a single point of contact, you’ll always know who to call when you have a question. We have the experience so that you can rely on us to guide you every step of the way.

Learn more about JTC’s 1031 services

Frequently Asked Questions: 1031 Exchange Timeline and Deadlines