A 1031 exchange can allow you to build wealth by deferring your capital gains taxes and investing the proceeds into a new investment property. However, failing to meet all IRS requirements could be a costly mistake. If you miss a deadline, your exchange will fail, and you will lose your tax advantages.
These critical deadlines are outlined in the 45-day rule and the 180-day rule. Both are hard deadlines with no exceptions or extensions, making it essential to understand the details thoroughly. Following, you’ll find an in-depth look at four important things you need to know about the 180-day rule.
What is the 180 Day Rule?
A 1031 exchange is governed by Section 1031 of the U.S. Tax code, which explains the steps you must take to complete your exchange. The code states that once you sell your relinquished property, you must identify one or more potential replacement properties within 45 days and purchase one or more of those properties within 180 days. This may seem pretty straightforward, but there are some crucial nuances you need to be aware of.
1. 180 Days is Set in Stone
The 180-day rule requires you to close on your replacement property within 180 calendar days from the date you close on your relinquished property. If the 180th day falls on a weekend or holiday, you’ll need to plan ahead to ensure your closing occurs before the deadline.
2. The Rules Run Concurrently
The 45-day rule and the 180-day rule run concurrently, so if you take the full 45 days to identify your replacement property, you’ll only have an additional 135 days to close on the property and accept its title. The timeline begins on the day you close on your relinquished property.
3. Understand the Definition of “Closing”
Many investors wonder what technically qualifies as “closing.” If you’ve signed paperwork but still have some details to work out with the seller, have you met your obligation?
Legally, a closing is a final transaction between a property buyer and the seller. This means that all agreements are finalized, and paperwork is signed and exchanged. The seller receives their money during the closing process, and the buyer receives title to the property. Once everything is signed, the transaction is both binding and irrevocable. All of these requirements must be met to qualify as an official “closing” for a 1031 exchange.
4. You May Have Less Than 180 Days
Unfortunately, federal laws can sometimes be confusing, and this one is no exception. The 180-day rule actually states that you must receive title to your replacement property no later than the earlier of:
- Midnight on the 180th day following the closing of the sale transaction on the relinquished property or
- The due date of your federal tax return for the year in which the sale of the original property occurred, including extensions
If the closing date on your relinquished property falls between January 1st and October 16th, the second condition won’t come into play. However, if you close between October 17th and December 31st, you will have less than the full 180 days to close on your replacement property.
If you haven’t closed on your replacement property by your tax return filing date, you’ll need to file an extension. You’ll still need to close within 180 days of the initial closing and then file your federal tax return.
Explore Your 1031 Exchange Options
If you’re considering a 1031 exchange, timing is everything. Working with a knowledgeable professional can help ensure you don’t miss any critical deadlines that could cause your exchange to fail.
Please reach out to our team to schedule a consultation for help with navigating the process or exploring potential replacement properties.