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What is a Delayed 1031 Exchange?

Investors can use 1031 exchanges to defer capital gains tax on real estate investments. There are several types of 1031 exchanges, including the delayed exchange.

In a delayed 1031 exchange, the exchanger sells their real estate asset — known as the relinquished property — before acquiring a replacement property. The proceeds from the relinquished property go to a Qualified Intermediary (QI) — someone the property seller chooses to oversee the 1031 exchange process — who then directs that money to purchase the replacement property.

Unlike a simultaneous 1031 exchange where the relinquished property and replacement property must close at the same time, a delayed 1031 exchange gives exchangers 45 days from the time they sell their relinquished property to identify a replacement. Exchangers have 180 days from selling their relinquished property to close on their replacement property. 

A delayed 1031 exchange differs from a reverse exchange. The delayed “forward” model requires the exchanger to transfer their relinquished property before acquiring a replacement and extends the time between those steps. A reverse 1031 exchange switches the order but bars exchangers from holding both assets simultaneously.

What Are the Advantages of a Delayed 1031 Exchange?

Generally speaking, delayed 1031 exchanges are more straightforward than simultaneous 1031 exchanges. Because the relinquished and replacement properties must close at the same time in a simultaneous exchange, the exchanger must ensure everything occurs in the same precise window. Otherwise, they may experience an incomplete exchange and incur capital gains tax. With a delayed 1031 exchange, exchangers have more time to complete the sale and acquisition transactions. 

Exchangers also typically have more real estate options in a delayed 1031 exchange. In a simultaneous exchange, exchangers are limited to replacement properties owned by parties interested in the exchanger's relinquished property. A delayed exchange gives the exchanger the freedom to broaden their search for a replacement property. 

History of Delayed 1031 Exchange

The 1031 exchange has been around since The Revenue Act of 1921. Initially, exchanges were difficult because they had to be simultaneous. In the late 1970s, the Starker v. the United States court case set a precedent for delayed exchanges. 

The Starker family sold timberland to the Crown Zellerbach Company. Instead of taking cash for the sale, the Starkers took a credit with Crown Zellerbach. Over a few years, Crown Zellerbach bought properties on the Starker's behalf, applying the value to the Starkers' credit.

The IRS questioned these transactions because the Starkers didn't account for capital gains on the timberland and the property exchange didn't coincide with the timberland sale. The case went to court, which ruled in favor of the Starkers. This decision resulted in a tax code change in 1984 that formally recognized delayed exchanges.

Delayed 1031 Exchange Timeline

While the Starker family's delayed exchange spanned several years, today's delayed 1031 exchanges are limited to specific time frames. From the date their relinquished property closes, exchangers have 45 days to identify a replacement property and 180 to close on it:

  • Day 1: The delayed timeline begins on the date the relinquished property closes.
  • Day 2 to 44: The exchanger looks for a replacement property.
  • Day 45: The exchanger must identify a replacement property by this deadline.
  • Day 46 to 179: The exchanger pursues the acquisition of the replacement property.
  • Day 180: The deadline to close on the replacement property occurs 180 days closing on the relinquished property.

Register With 1031 Crowdfunding

At 1031 Crowdfunding, we provide a platform to help with your delayed 1031 exchange. Register with us today to gain access to our unique marketplace of 1031 exchange-approved properties.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.