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While investors are offered broad latitude by the IRS in terms of the “like kind” property allowable, the agency is quite specific in its 1031 exchange definition particularly in regard to timeframes.
When choosing a replacement property under this IRS code, investors are not limited to the same type of property relinquished. An investor shedding an office building may choose from any number of investment properties including vacant land, multi-family units or tenant-in-common investments that allow for fractional ownership of institutional-quality real estate. The key challenge in meeting the demands of the IRS 1031 exchange code lies in the very specific timeframes by which replacement properties must be identified and acquired.
In its 1031 exchange definition, the IRS requires that investors identify potential replacement properties within 45 days of closing the sale of the relinquished property. Once these replacement properties are identified and the 45-day mark has arrived, no more potential acquisitions can be added to the list and the investor must choose from among the properties submitted to the IRS. The investor has only 180 days (only 135 after the first 45-day identification period has passed) to close on one or more of those properties in order to satisfy the 1031 exchange definition. Should the investor be unable to close on properties previously identified to the IRS within the 180 day timeframe, the 1031 exchange will become null and the investor will be responsible for the capital gains tax on the relinquished property.
For more information on the 1031 exchange definition, please click here.
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