The first relates to the designation of a replacement property. Once your property is sold, the intermediary will receive the cash. You can’t receive the cash or it will spoil the 1031 treatment. Also, within 45 days of the sale of your property, you must designate the replacement property in writing to the intermediary, specifying the property you want to acquire.
The IRS says you can designate three properties if you eventually close on one of them. You can even designate more than three if they fall within certain valuation tests.
The 45-day identification period is when the investor must identify the new property they intend to purchase after selling the first property to qualify for the tax-deferred status.
This time frame is 45 days from the date of the sale of the relinquished property, and it’s a strict and non-extendable deadline. If the investor does not identify the new property within this time frame, they will not qualify for the tax-deferred status and will have to pay taxes on the gain from the sale of the relinquished property.
An investor owns a commercial property they purchased for $500,000, which has appreciated to $800,000. They decide to do a 1031 exchange and use the proceeds from selling the commercial property to purchase a new commercial property.
The investor sells the commercial property on March 1st, which means they have 45 days, until April 15th, to identify the new property in order to qualify for the tax-deferred status. If the investor does not identify the new property by this date, they will have to pay taxes on the $300,000 in appreciation from the sale of the first property.
- Start the process early to ensure you have enough time to find the right replacement property and identify it within the 45-day identification period.
- Keep a record of the properties you view during the identification period, as the IRS requires written documentation of the properties identified.
- Keep track of the deadlines to ensure you identify the new property within the 45-day identification period.
- If you plan a 1031 exchange, remember that the 45-day identification deadline cannot be extended.
- Be prepared to act quickly once the relinquished property is sold, as you will have 45 days to identify the new property.
- The 45-day period begins on the date of the sale of the relinquished property, not the closing date.
- Consult a qualified tax professional or attorney to ensure compliance with all IRS rules and regulations.
- Be prepared to identify a new property before the 45-day deadline, even if it means purchasing a property that is not your first choice.
- Consider working with a real estate agent with experience in 1031 exchanges to help you find a replacement property that meets your needs and can be identified within the 45-day identification period.
In a 1031 exchange, the 45-day identification period is a critical component as it determines the eligibility of an exchange for tax-deferral status. It’s important to remember that the 45-day period starts on the date of the sale of the relinquished property, not the closing date.