What is the 1031 Exchange Timeline?
However, a 1031 exchange should begin well before the 180 days. This is because it is essential to identify a trustworthy, third-party custodian prior to selling your relinquished property. The third-party custodian must hold the funds from the sale of the property you wish to relinquish. If you touch the funds from the sale of the property that you are trying to relinquish you will no longer be able to perform a 1031 exchange. Additionally, you will still be liable for capital gains taxes and potentially depreciation recapture taxes.
The IRS gives you a short, 45-day window to identify up to three like-kind properties. The 45-day window runs concurrently with the 180-day window. For example, after the 45-day window to identify, there will only be 135 days left to close on one or more of the properties in order to be compliant with the 1031 exchange rules. It is also important to note that the IRS does not allow for any types of extensions with regards to 1031 exchanges.
What does Like-Kind Property Mean?
In order to successfully complete a 1031 exchange, the replacement property must be of like-kind. The Internal Revenue Service (IRS) defines it as properties that are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. According to the Internal Revenue Code (IRC)
1031 Exchange Like-Kind Examples
Generally speaking, real properties, improved or unimproved are considered like-kind. For instance, a warehouse is generally like-kind to another warehouse. However, a warehouse in the United States cannot be exchanged for a warehouse outside the United States. See below for more examples.
- Multifamily property for a shopping mall.
- An apartment building in exchange for a medical complex
- A hotel in exchange for a warehouse.
- A condo in exchange for retail property
- A SFH rental in exchange for vacant land.
As stated by the IRS the following generally do not qualify as like-kind exchanges:
- Personal residences