Are you new to investing and need to know more about the 1031 exchange timeline? You must understand the timeline to defer capital gains tax from the sale of your investment property.
If you fail to follow the guidelines, your tax liabilities can consume your expected profits.
Do you want to know more about the 1031 exchange timeline, but you don’t know where to start? Keep reading and learn more here.
Understanding the 1031 Exchange Timeline
First, let’s start with what is a 1031 exchange? A 1031 exchange is an IRS tax code. It’s named for the tax code section that it falls under. Section 1031 allows taxpayers to defer capital gains of tax liabilities when they sell properties and use the proceeds to purchase new property.
The 1031 exchange rules are in place to reduce fraud. The program benefits investors, and the IRS wants to keep tight control.
When to Identify Properties
The IRS has provided strict rules for 1031 exchange filings. The rules state that sellers must identify properties within 45 days of closing. These are calendar days, not business days.
Additional criteria must also meet the guidelines, and they include the following requirements:
- Must be an investment property
- Must be real estate
- Equal to or greater value
- Owned for a year or longer
In addition to these 45-day closing rules, you must also identify with one of the following ownership rules.
When you are selling a property and intend to use the 1031 exchange, you can identify up to three potential replacement properties. In 1031 real estate exchanges, the seller isn’t required to provide the market value at this time.
Two Hundred Percent Rule
The 200 percent rule allows the investor to list multiple properties. The catch is you’re limited to a cap of 200% of the value of the property you’re selling.
Ninety-five Percent Rule
The 95% rule also allows you to list multiple properties. However, you must acquire 95 percent of the fair market value (FMV) on the properties you ultimately purchase. Like the 200% rule, the value of the purchased properties cannot exceed 200% of the value of the real estate you’re giving up.
The 1031 exchange rules specify that you must close on all properties within 180 days. The clock starts ticking on the day you close on the property you’re selling. To reiterate, these are calendar days and not business days.
When deciding whether to buy one or all replacement properties, remember they must become a part of your real estate portfolio. The properties are not for personal use.
The penalty for not meeting the 1031 exchange requirement and timelines is simple. Proceeds from the sale of investment properties can become taxable income.
The 1031 exchange timeline is simple. If you plan ahead and be strategic about buying and selling properties, you’ll come out the winner.
It’s always a good idea to consult with a tax accountant and real estate lawyer when investing in real estate. For more content on the real estate market, check back often for trending topics.