The 45-Day Timeline for a 1031 Exchange
In the 1031 exchange process, investors must understand how much time they have to complete the exchange. Searching for properties that meet the criteria and fit your investment goals can be time-consuming. To meet all the guidelines properly and efficiently, you need to understand the rules and have the right strategy in place.
The 1031 Exchange 45-Day Rule
According to Section 1031 of the U.S. Internal Revenue Service code, the 1031 exchange time limit is 45 days to identify the potential replacement property. You have 180 days to purchase the property, including the days you used during the identification phase.
Tenants, Toilets & Trash
Some investors are tired of dealing with the day-to-day responsibilities of actively managing real estate. With a DST, investors can still enjoy the benefits of owning real estate without dealing with the tenants, toilets and trash.
45 Day ID Period
Anyone who has attempted a 1031 exchange knows that 45 days can go by quickly when choosing a replacement property. DSTs can take the headache out of the identification process by offering investors numerous properties that can be identified immediately.
When a replacement property is lesser in value than the previously sold property, the remaining money must be taxed. This leftover money is known as excess boot. With a DST you can invest down to the penny, ensuring that 100% of your exchange funds are invested.
With a DST the property is already purchased, thus removing any closing risk. This makes a DST a great potential backup in your identification process. Some investors choose to identify a DST as “backup assurance” in the event their other identified properties do not close.
Taxes Can be Costly
If you complete the exchange successfully within that time, you will qualify to defer taxes on your capital gains for the investment. The first 45 days of the 1031 exchange are crucial, since you must complete thorough research and due diligence within the time window. To navigate the process efficiently, have a plan before you get started.
The above chart shows the potential tax savings you could experience by utilizing a 1031 Exchange.
This is an example, it is important to know your individual tax situation.
The 1031 Exchange Timeline and Guidelines
The 1031 exchange process lays out precise requirements and timelines. Keep in mind these rules to help you navigate your exchange successfully:
Meet the identification deadline: The IRS states that you must clearly describe, in writing, the potential properties you've identified and submit them by midnight on the 45th day.
Identify your property clearly: You must clearly describe your potential purchases and ensure they match your final acquisition. You should include the unit numbers and the exact address of your properties in the description.
Remember the 3 Property Rule: You can choose up to three properties of any market value if you're considering purchasing at least one of them.
Know the 200% Rule: If you select more than three properties, you need to ensure that their combined value is less than 200% of your original property's market value.
Understand the rule exceptions: If your potential purchases violate the 3 Property Rule and 200% Rule, you need to acquire 95% of these new holdings' combined market value.
Give yourself time to change your identification: As long as you are within the 45-day period, you can change your mind on a potential property you've chosen and provide a new identification in writing.
Navigate the 45 Days Successfully With 1031 Crowdfunding
At 1031 Crowdfunding, we understand that the 1031 exchange rules can be complex, and our expert team is dedicated to helping investors navigate the process with professional guidance from start to finish. You can cut down on the timeline of your exchange from 180 days to less than a week — most of our clients close on their new purchases within 3-5 days.
Let us make your 1031 exchange process easier. Register to View All Properties today.