By Lei Jiang, Esq., Lei Jiang LLC.
If you sell investment or business real property and reinvest in similar real property, a 1031 exchange can defer the capital gains tax. It covers real property only — equipment, vehicles, and artwork do not qualify (I.R.C. § 1031(a)(1)). But two strict deadlines decide whether it works at all.
First, you must identify your replacement property within 45 days after you sell the old property. Second, you must complete the purchase within 180 days after the sale, or by the due date (with extensions) of your tax return for the year of the sale, whichever comes first (I.R.C. § 1031(a)(3)). For a sale late in the year, you may need to extend your return to keep the full 180 days. Miss either deadline and the exchange fails — the gain becomes taxable. There is no extension for a slow closing, and a “parking” arrangement, where an intermediary holds property for you, does not stretch the 180 days. You may identify up to three replacement properties regardless of value, or more if their combined value stays within 200% of what you sold.
One practical point: set up the exchange before you close the sale. The sale proceeds must go through a qualified intermediary — if the money touches your hands first, the exchange is disqualified. And the like-kind test for real estate is broad: a rental house can be exchanged for commercial land, for example. Line up the intermediary and your replacement-property search before closing, and put both deadlines on the calendar the day you sell.
The practical takeaway: 1031 still defers tax on real estate swaps, but only real property qualifies, and the 45-day and 180-day clocks start running the day you sell.
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This article is general information, not legal advice for your situation.