The 45-Day Timeline for a 1031 Exchange: What You Should Know
The 45-Day Rule for a 1031 Exchange
The 45-day rule for 1031 exchanges — or the identification (ID) period — states that an investor has 45 days from the date of the sale of the relinquished property to identify replacement properties. 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.
Property identification is a crucial step because these properties will be the only options to qualify for your 1031 exchange, and they must be like-kind — the same nature or character as your relinquished property.
This identification must be in writing, stating the property’s legal description or distinguishable name and its street address. Sign the identification and deliver it to your Qualified Intermediary, the seller of the replacement property, or another party involved in the exchange. Delivering the notice to a person acting as your agent — such as your accountant, real estate agent, or attorney — is insufficient.
A like-kind exchange must meet the 1031 exchange 45-day rule to prevent the gain from being taxable. The exchange does not have to be a simultaneous swap, but the IRS does not offer a 1031 exchange 45-day rule extension. The 180-day period to acquire one of these identified properties starts simultaneously with the 45-day rule upon initial sale of the relinquished property.
Advantages of DST 1031 Exchanges
Shift Management Responsibilities to a Third
Some investors do not prefer to oversee the day-to-day responsibilities of actively managing real estate. With a Delaware Statutory Trust (DST), investors can still enjoy the benefits of owning real estate without dealing with the tenants and their needs.
Easily Find a Replacement Property Within the
A 1031 exchange 45-day identification period can go by quickly when choosing a replacement property. DSTs can quicken the identification process by offering investors numerous properties that can be identified immediately.
Avoid Excess Boot
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.
Get Backup Assurance for Your DST
With a DST, the property is generally already purchased, thus mitigating 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.
Identify your property clearly: You must clearly describe your potential purchases and ensure they match your final acquisition. You should include the exact address of your properties in the description.
Give yourself time to change your identification: As long as you are within the 45-day period, you can change your mind about a potential property you’ve chosen and provide a new identification in writing.
Remember the Three(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.
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 three to five days.
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 is speculative in nature and involves 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.
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