As the real estate market booms in 2021, you may be considering a 1031 exchange. If so, you should know that the 1031 exchange timeline 2022 is shorter than usual. Understandably, many people are still confused about the 1031 exchange rules, given the unusual circumstances, we have found ourselves in.
To help you understand how to proceed with your 1031 exchange, we’ve compiled some important information for you.
What Is A 1031 Exchange?
A 1031 exchange is an Internal Revenue Code (IRC) provision that allows real estate investors to sell their investment property and defer capital gains taxes on profits if they purchase another property of equivalent or more excellent value.
The 1031 exchange tax law allows a “like-kind” exchange in which one type of property can be traded for another. For example, rental income property can be traded for raw land, or commercial real estate can be exchanged for an apartment building.
In order to complete the exchange, you must engage a qualified intermediary, who will act as your agent during the process and hold your proceeds from the sale until you purchase the replacement property. It is critical that you follow these rules strictly; otherwise, your transaction will not qualify as a 1031 exchange, and you will incur a substantial tax liability.
The 45 and 180-Day 1031 Exchange Timeline
Before proceeding, remember a 1031 exchange time limit must be strictly met. So, once you’ve sold your property and have your exchange funds, you have 45 days to identify up to three potential replacement properties. The clock starts ticking from the date of closing on the relinquished property.
If you can identify only one replacement property, that’s okay; the IRS doesn’t require you to select three. You simply need to close on your replacement within 180 days of selling your relinquished property to qualify for a 1031 exchange. This is where non-simultaneous exchanges come in.
If all goes well, once you’ve identified a replacement property, you’ll be able to find a buyer and close on it within 180 days. However, if that doesn’t happen, which is more common than not, you’ll need another extension or risk paying taxes on your capital gains.
Keep in mind that if two years have passed since you sold your relinquished property, it’s too late for any extension whatsoever: the IRS has stringent rules about extensions for 1031 exchanges and will not grant exceptions under any circumstances.
What Are The Guidelines Of A 1031 Exchange?
The 1031 exchange is a tax deferral strategy that allows investors to sell real estate and reinvest the profits into another property without paying taxes on the sale. However, there are 1031 exchange timelines and rules that must be followed.
- The investor must have owned and used the relinquished property as their own residence for at least two years before the exchange.
- The investor must purchase a new property with the proceeds from the sale of the relinquished property within 180 days of its sale. This can be done by purchasing another single-family residence, townhouse, apartment complex, or commercial building.
- If the amount is not met within 180 days after selling their old home, they can roll over any remaining balance into another 1031 exchange within 180 days after that deadline has passed (as long as they meet the other two requirements).
- Both properties must be held for investment purposes only. It cannot be used as a primary residence for any family member who owns an interest in either property (including spouses).
Remember that failure to comply with IRS 1031 exchange rules 2022 may put you and you’re business in a bad situation. Therefore, you must learn about 1031 exchange timelines and rules is crucial to avoid unnecessary consequences.
Rules And Details To Keep In Mind When Filing For A 1031 Exchange
When you’re considering filing a 1031 exchange, it’s vital to understand the rules of the process. Otherwise, you might find yourself in a relationship with an exchange partner you don’t even want to be in. The rules are pretty straightforward:
- You’ll need to meet all required real estate 1031 exchange requirements. These can include but aren’t limited to: physical presence in a foreign country (whether you live there or not), being an American citizen and holding the title of real estate property, having income taxes paid on that property, and owning the property for at least one year before filing for 1031 exchange.
Suppose your tax return shows that any of these conditions weren’t met or weren’t met by enough periods before applying for the 1031 exchange. In that case, you’ll have problems completing the IRS requirements for eligibility.
- 1031 exchanges can take place only once every 12 calendar months from the date of application until December 31st of that year. That means if your 1031 application was filed on September 15th, 2021, it must remain inactive until December 31st, 2022, before another application can be considered eligible under the rules and regulations established by Congress.
- No home improvement activities are permitted during the 12-month periods before and after the exchange. This rule applies no matter what kind of government authority grants permission for this activity beforehand (zoning permits or special use permits). Any sort of home improvement work performed during this period would render both properties ineligible according to U.S. tax code Section 1031.
Maximizing Your Investment (The Power Of A Broker)
Even if you don’t have the knowledge or resources about 1031 exchange timelines and rules, it may be in your best interest to find someone who does.
The services and expertise of a qualified broker are invaluable. A broker can help you get the most out of the 1031 exchange process by doing some or all of the following:
- Finding you a suitable replacement property.
- Establishing a viable timeline for completing an exchange (and sticking to it).
- Keeping track of deadlines and documentation requirements.
Although hiring a broker will cost you more money upfront, working with experts can save you money in the long run. A good broker will know how to get the best deal on your investment property, sell your old one quickly and easily (possibly at an increased price), and will make sure that everything is correctly filed so that there are no expensive delays or legal issues further down the road.
Conclusion
A 1031 exchange is an effective tool that, if properly executed and with the help of a qualified intermediary, can save you thousands of dollars in taxes and increase your profits. You may be thinking of rolling the dice yourself, but 1031 exchange timelines and rules are definite and must be followed to avoid tax penalties.
If you’re interested in pursuing a 1031 exchange, consult with an accredited real estate professional who can help guide you through the process.
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