1031 Exchange: Timing & Deadlines

It is crucial to plan in advance for a successful exchange. Pay close attention to the timing of the sale of the relinquished property, estimate equity and debt replacement goals to avoid boot (taxable gain), and work with a qualified intermediary.

Do not miss any deadlines. The IRS will not honor the exchange if you fail to meet the 45-day identification period or if you do not acquire replacement property within the 180-day exchange period.

Make every effort to sell before purchasing a replacement property. If you identify an ideal replacement property before selling your relinquished property, you may need to negotiate a reverse exchange. This involves either parking the replacement property or the relinquished property with an Exchange Accommodator Titleholder for 180 days, pending the completion of the exchange. Note that a reverse exchange is considered more aggressive and requires careful adherence to IRS guidelines.

Avoid changing how the title is held during the exchange. Any changes to property ownership or dissolving partnerships during the exchange can lead to the exchange being invalidated due to holding-period issues.

Be mindful of the “napkin test” in a balanced exchange. This test considers two components: if you are trading down in total value, you may be taxable to the extent of the trade-down, and if you are trading down in equity, you may be taxable to the extent of the trade-down. It’s important to consider these factors to ensure compliance with tax regulations.