In a 1031 Exchange, investors defer capital gains taxes by “exchanging” the sale proceeds into a new property that qualifies as “like kind.” The replacement property must be real property used for investment or business purposes. This strategy offers meaningful tax advantages, but it also requires strict adherence to IRS rules — especially regarding timing.
Eligible properties include business and rental property, as well as other real property held for investment or productive use in a trade or business.
It is important to plan the exchange in advance and determine if a 1031 Exchange is the right strategy based on your individual circumstances, property ownership structure, and investment goals.
This article outlines the key dates and deadlines in a 1031 Exchange timeline. With this knowledge, investors can better understand the process and reduce the risk of costly mistakes.
At First National Realty Partners, we have extensive experience helping investors deploy 1031 Exchange funds. To learn more about our current commercial real estate investment offerings, click here.
To grasp the timeline details, it’s useful to first understand how a 1031 Exchange works.
How Does a 1031 Exchange Work?
As described above, a 1031 Exchange involves selling an existing property — the “relinquished property” — and using the proceeds to purchase a new “replacement property.” The process of purchasing the new property must follow strict IRS guidelines.
Most 1031 Exchanges are “delayed” transactions, where the relinquished property is sold first and the replacement property is acquired later. However, there is also a “reverse exchange,” in which the replacement property is purchased first and the relinquished property sold afterward.
In both cases, investors must carefully follow specific dates and deadlines to remain in compliance with IRS 1031 Exchange rules. The process can be time consuming due to the strict documentation and regulatory requirements.
There are several parties involved in a 1031 Exchange, including the taxpayer, qualified intermediaries, and other related entities. The person responsible for the exchange must ensure all compliance requirements are met.
General Dates & Deadlines for a 1031 Exchange Timeline
There are three key dates in 1031 Exchange timing—these important dates and key deadlines are crucial for compliance:
- The day the relinquished property is sold
- The day the replacement property is identified
- The day the replacement property purchase is completed
Each is explained below.
Day 0: The Relinquished Property is Sold
Once the sale of the relinquished property closes, the 1031 clock begins. This is referred to as Day 0.
Day 45: Identify the Replacement Property
From Day 0, the exchanger has 45 days to formally identify the intended replacement property. IRS rules require the exchanger to “provide an unambiguous description of the potential replacement property prior to midnight on the 45th day after the close of the relinquished property.” During this period, it is important to identify potential properties and ensure that all properties identified are documented within the 45-day window.
In most cases, a legal description or executed purchase agreement is sufficient. If multiple properties are being considered, the following identification rules apply:
- Identify up to three properties of any value, with the intent to purchase at least one.
- Identify more than three properties, provided their total value does not exceed 200% of the relinquished property’s market value.
- Identify more than three properties exceeding 200% of the relinquished property’s value if 95% of the total fair market value of all identified properties is ultimately acquired.
This is known as the property rule, which limits the number of properties that can be identified under IRS regulations.
NOTE: Any properties purchased and closed within the 45-day period are automatically considered identified for 1031 Exchange purposes. Investors may also purchase multiple properties as replacement properties, subject in some respects to the rules above, provided all acquisitions are completed within the 180-day deadline.
How to Formally Identify (Documentation & the QI)
Replacement properties are identified in writing, using their legal descriptions, in documentation submitted to the Qualified Intermediary managing the transaction. Qualified intermediaries play a critical role in holding and transferring sale proceeds to ensure compliance with IRS rules.
Day 180: Close on the Purchase
Investors have 180 calendar days from the sale of the relinquished property to close on the replacement property. Importantly, this is 180 days from the sale date — not from the date of identification.
In other words, investors have an additional ~135 days after identification to complete the purchase. Missing this deadline can create a material tax liability.
The following diagram (referenced in the original version) illustrates this 1031 timeline for both delayed and reverse exchanges.
Associated Timeline and Steps for Variations of 1031 Exchanges
Delayed 1031 Exchange
In a delayed 1031 Exchange, the clock starts when the relinquished property is sold. The exchanger then has 45 days to identify the replacement property and 180 days to close on its purchase.
Reverse 1031 Exchange
In a reverse exchange, the sequence is inverted. The replacement property is purchased first, and the exchanger then has 45 days to identify the relinquished property and 180 days to complete its sale.
While this approach may seem unconventional, it’s often used by investors managing multiple properties within their portfolios who must decide which asset to sell.
Disaster Relief
Under IRS Revenue Procedure 2018-58, investors may qualify for an extension of 1031 timeline requirements if their property lies within a federally declared disaster area.
The specific relief period depends on the details of the event and the transaction but may extend up to 120 days. To review the official guidance, click here.
What Happens if 1031 Rules Are Not Followed?
The primary goal of a 1031 Exchange is tax deferral — a valuable tool for long-term portfolio growth. However, missing any required 1031 deadlines can cause the transaction to become taxable.
For example, if an investor realizes a $1 million gain and faces a 20% long-term capital gains tax rate, they could owe $200,000 in taxes if they fail to meet the required timelines.
To avoid such costly errors, investors should always engage a Qualified Intermediary and, when appropriate, consult a real estate attorney or CPA. Errors in documentation or missing deadlines can result in penalties or loss of tax deferral benefits. Though professional fees apply, they are a small price to pay compared to an unexpected tax bill.
Alternatives to Consider
Because the 1031 exchange timeline can be demanding — and because not every investor wants to purchase an entire property — there are two fractional ownership alternatives worth considering.
1. Delaware Statutory Trust (DST): A DST is a trust formed under Delaware law that acquires property and sells shares to investors. Investors receive a proportional share of the income and profits generated by the underlying asset.
2. Tenants in Common (TIC): A TIC structure allows investors to directly own a fractional interest in an institutional-quality property, entitling them to their proportionate share of income and profits.
Both DSTs and TICs qualify as replacement properties under IRS rules. They provide speed, flexibility, and passive income potential — as they are professionally managed.
Summary of 1031 Exchange Time Frames
A 1031 like-kind exchange is highly time sensitive, with three key dates investors must remember:
- Day 0: The sale of the relinquished property — the starting point for all subsequent deadlines.
- Day 45: The deadline to identify the replacement property, following IRS identification rules.
- Day 180: The deadline to close on the identified property (or properties).
Failure to meet these deadlines may disqualify part or all of the tax-deferred benefit — an expensive mistake.
For investors seeking greater efficiency, both Delaware Statutory Trusts and Tenants in Common structures can simplify the process, as both qualify as suitable replacement properties.
Role of a Qualified Intermediary
A qualified intermediary is a cornerstone of a successful 1031 exchange, ensuring that real estate investors can defer capital gains taxes while remaining fully compliant with IRS regulations. The primary responsibility of a qualified intermediary is to act as a neutral third party who facilitates the exchange process by holding the proceeds from the sale of the relinquished property and using those funds to acquire the replacement property. This critical step prevents the investor from taking constructive receipt of the cash, which would otherwise trigger capital gains taxes and disqualify the transaction from 1031 exchange benefits.
From the moment the relinquished property is sold, the qualified intermediary steps in to manage the flow of funds. They receive the sale proceeds directly and place them in a secure, segregated account, ensuring that the exchanger never has access to the cash. When the time comes to purchase the replacement property, the intermediary disburses the funds according to the investor’s instructions, completing the transaction in a way that preserves the tax-deferred status of the exchange.
Beyond managing funds, the qualified intermediary is responsible for preparing and executing all necessary documentation, including the exchange agreement, assignment of contract, and notices of assignment. These documents are essential for demonstrating to the IRS that the exchange process has been followed correctly and that the investor has not taken possession of the proceeds at any point.
It’s important to note that the qualified intermediary must be engaged before the closing of the relinquished property. Their role is strictly limited to facilitating the exchange; they do not provide investment advice, select potential replacement properties, or influence the investor’s decisions. The real estate investor retains full control over identifying and directing the purchase of replacement properties, while the intermediary ensures that all transactions are executed in accordance with IRS rules.
Selecting a reputable and experienced qualified intermediary is vital. A knowledgeable intermediary can guide investors through the complexities of the exchange process, help ensure that all deadlines are met, and provide peace of mind that the transaction will not be jeopardized by procedural errors. This is especially important for investors dealing with multiple properties or complex transactions, where the risk of missteps—and the potential for unexpected capital gains taxes—is higher.
In summary, the qualified intermediary plays an indispensable role in 1031 exchanges by safeguarding the proceeds, preparing essential documents, and ensuring strict compliance with IRS regulations. By working with a trusted intermediary, real estate investors can confidently navigate the exchange process, defer capital gains taxes, and achieve their long-term investment objectives through strategic reinvestment in like-kind properties.
Summary & Conclusion
A 1031 Exchange allows real estate investors to defer capital gains taxes on the sale of an investment property by reinvesting into a “like kind replacement property.” This can help defer taxes on profit from the sale, preserving more capital for reinvestment.
To achieve full tax deferral, investors must comply with specific timing requirements: identify a replacement property within 45 days of the sale and complete the purchase within 180 days. In a reverse exchange, these same rules apply in reverse order. It is advisable to hold the new property for several years to maintain compliance with IRS regulations.
Missing any of these deadlines can trigger capital gains or income taxes — potentially substantial ones. It’s therefore best practice to engage experienced professionals who can guide compliance with all IRS 1031 Exchange rules, including consulting a tax advisor and ensuring the exchange is properly reported on your tax return.
Interested In Learning More?
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If you are an Accredited Real Estate Investor and would like to learn more about our current opportunities, contact us at (800) 605-4966 or ir@fnrpusa.com for additional information.
