The merits of a 1031 Exchange are clear: this type of exchange allows property owners to defer capital gains taxes associated with the sale of their property when exchanged for “like kind” property. That said, the requirements for qualifying for the exchange bring up numerous issues that must be managed effectively in order for the exchange to produce the kind of value it is capable of producing.
One of those sets of requirements has to do with the timing of the transactions. Specifically, there is a 45-day identification period and a 180-day exchange period, which are both crucial to understand and operate within.
The 45-Day and 180-Day Marks are Crucial
The 45-day identification period relates to the Internal Revenue Services’ requirement that the replacement property be identified with 45 days after the closing of the relinquished property. Identification means that the property must be named by street address, plat and lot, metes and bounds or tax lot number. Vague references to the property are not adequate to meet the requirement. The specific identification must be made to the Qualified Intermediary (QI) by midnight of the 45th day after close of the relinquished property.
Within those parameters, there are a couple of other things to understand. There are several ways to meet the 45-day identification requirement. First, up to three properties may be so identified, though at least one of the properties must be the one actually purchased in the exchange (though, in fact, up to all three up then can be purchased). This is the so-called Three Property Rule.
Second, an unlimited number of properties can be identified as long as their combined total value does not exceed two times the value of the relinquished property. This is known as the 200% Rule. Finally, an unlimited number of properties can be named so long as 95% of the value of all properties so identified is ultimately purchased. This is called the 95% Rule. It rarely used.
Little Wiggle Room in the Requirements
In terms of the 180-day exchange rule, the path is a little more clear cut. Simply stated, acquisition of one or more of the properties identified in the 45-day window must be completed within 180-days after the closing of the relinquished property. While clear cut, there is also little wiggle room in policy around the number of days; it does not take into account holidays or weekends, for example.
So, again, it is important to understand that there are some nuances to the rules governing 1031 exchanges, the requirements set around the time of the transactions are relatively straightforward, unambiguous and non-negotiable. This is yet one more reason why it pays to ensure you are working with experienced and qualified professionals on these exchanges.
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