At its most basic, a 1031 Exchange allows for one investment property to be exchanged for another of equal value. The benefit of doing this is that there’s little to no capital gains tax payable as there’s no real “cashing out” involved.
The ins and outs of a 1031 Exchange are more complex and involve adhering to a number of deadlines and rules. Two of such are the 45-day rule and the 180-day rule. Below is a brief explanation of what each of these is and what it requires you to do.
The 45-day rule allows you 45 calendar days from the date of closing your sale in order to find a potential replacement property. This doesn’t mean that you need to have started the process of closing or having the new property under contract, you’re just required to show that you’re actively looking and have a list of properties you’re considering.
You, of course, don’t need to wait until you’ve closed on your sale to find another property. In order to stop any unnecessary panic it’s always a good idea to start looking at the same time you’re thinking about selling.
The 180-day rule also starts to run on the date of your closing. This rule states that you must have completed the 1031 Exchange by the time the 180 days are up. This property must be one of those you’d included in the list of properties that you created. Given that the time frame is relatively short overall, it’s recommended that you identify the replacement property as soon as possible within the 45 days in order to give you as much time as possible to close.
Navigating the 1031 Exchange process can be complex and requires you to move quickly. Having legal assistance helps you to make sure you’re complying with tight deadlines while not compromising on what you want.