Section 1031 Exchanges: Deadlines and Rules
A like-kind exchange under Section 1031 can defer tax on gain when you sell investment or business real estate and buy replacement property of like kind. The deferral is powerful, but the deadlines are strict and most failures come from timing and process, not from the property itself.
The two deadlines
| Deadline | Rule |
|---|---|
| Identification period | Identify replacement property in writing within 45 days after you transfer the property you gave up. The identification must be signed and describe the property clearly. |
| Exchange period | Receive the replacement property within 180 days after the transfer. |
| Earlier of two dates | The exchange period ends on the earlier of the 180th day or the due date of your return for the year of the transfer, including extensions. |
Qualified intermediary
In a typical deferred exchange, a qualified intermediary holds the sale proceeds so you never have control of the cash. If the intermediary is set up incorrectly, or you take control of the funds, the exchange can fail. Related parties and your agents generally cannot serve as the intermediary. Choose the intermediary and sign the agreement before the sale closes.
Boot
Cash or other non-like-kind property you receive, such as debt relief in excess of debt taken on, is called boot. Boot is generally taxable to the extent of the gain. Plan the purchase price and financing so the replacement property equals or exceeds the value and debt of the property sold, if you want full deferral.
Reverse exchanges
Sometimes the replacement property is bought before the old property is sold. These reverse exchanges have their own structures and timing rules and should be set up before the first purchase closes.
Common failures
- Missing the 45-day identification deadline, or identifying property in an unclear way.
- Receiving the sale proceeds directly.
- Using an intermediary who is a disqualified person.
- Taking boot without planning for the tax on it.
- Assuming that a personal residence or property held mainly for resale qualifies. Those generally do not.
General educational information. 1031 exchanges depend on the property, the structure and strict timing rules. Confirm the current rules on irs.gov and work with a qualified intermediary and a CPA or attorney before signing a purchase or sale agreement.