1031 Exchange Timelines
At Diversified Investment Strategies, we help investors through 1031 exchanges, so they can defer paying federal taxes on their investment property sales. There are many options, including DSTs, UP-REITs, oil and gas, Triple-Net NNNs and more, which we regularly update you on in our blog posts!
Today, let’s discuss 1031 exchange timelines, and the most common like-kind exchange types. These include simultaneous, delayed, reverse and construction/improvement exchanges.
Simultaneous – A simultaneous 1031 exchange is the simplest timeline to work with, if it works out. This occurs when the replacement property and relinquished property close on the same day. This is rare, as any sort of delay could disqualify the exchange.
For it to be simultaneous, it is either a two-party trade, where the two parties swap deeds, a three-party exchange, where an accommodating party facilitates the transaction, or with a qualified intermediary, who structures the entire exchange.
Delayed – This is the most common type of like-kind exchange. In a delayed exchange, the investor relinquishes the property before acquiring replacement property. The investor must hire a QI to hold the proceeds from the sale of the relinquished property in a trust for up to 180 days.
The investor has a maximum of 45 days from the sale of the relinquished property to identify the replacement property, and 180 days to complete the sale. They can identify up to three potential properties as long as they close on at least one of them. If done so in this timeframe, the investor will avoid having to pay federal taxes through the 1031 exchange.
Reverse – This is an exchange that occurs when the investor acquires a property through an exchange accommodation titleholder before identifying the relinquished property. This is also known as a forward exchange. Basically, you buy first and pay later.
Reverse exchanges can be tricky. They require all cash and many banks won’t offer loans for these. If the investor doesn’t close on the relinquished property during the 180-day period that the acquired property is “parked,” the exchange will be forfeited. Investors have 45 days to identify which property is going to be relinquished, and 135 days after that to complete the sale.
Construction –Investors may choose to make improvements on a replacement property using exchange equity. In order for this to occur, the investor must place the property in the hands of a QI for what remains of the 180-day period.
In order for an investor to use gains as part of a construction or improvement exchange, the equity must be spent on the improvements or as down payment by the 180th day, they must receive “substantially the same property” they identified by the 45th day, and the property must be equal or greater in value when deeded back to them. The improvements must be completed before the investor takes the title back from the QI.
If you’ve got questions about what type of 1031 exchange to use, and what timeframe to use it in, contact our team at DIS! We are here to answer all of your 1031 exchange questions and to help you through the entire process.
Bryan Hakola
Diversified Investment Strategies
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