In this article, I will share what’s 1031 exchange timeline according to Internal Revenue System (IRS) and how it works in the United States. Plus, how to apply these formulas in other countries. Everything you need to know about the timeline for the 1031 exchange will be here.
Table of Contents
- What is 1031 Exchange
- Best Companies for 1031 Exchange in the US
- How Does this 1031 Tax Exchange Work
- Four Types of Property and How They Are Taxed
- The 6 Rules of 1031 Exchange
- The 1031 Exchange Timeline
- 1031 Tax Exchange in Different Counties
- I am not a Tax Expert
What is 1031 Exchange
The 1031 Exchange is a tax code for deferring the capital gain tax of a property via reinvesting the whole amount in a different property. Here the Internal Revenue System (IRS) rules are strict. You must follow the rules properly to get qualified for this exchange.
But finding and acquiring an exchange property is challenging and also time-consuming. That is why there are some 1031 Exchange companies that can help you use this tax code easily.
Those Exchange companies will guide you through the entire process. They will help you determine if a 1031 Exchange is right, and how to find, select, and purchase a great property. Here are the best 1031 tax exchange companies in the United States that you can approach.
Best Companies for 1031 Exchange in the US
- First American Exchange
- Exeter 1031 Exchange Services
- Strategic Property Exchanges, LLC
- Wells Fargo
You can approach them. But if you want to do it yourself, here is the process. But be very careful as it is a matter of law. If you make any mistake, it can cause financial and other legal problems. I recommend you hire an expert and use this tax code for your own safety.
How Does this 1031 Tax Exchange Work
Let’s assume you want to sell your property and dont want to pay the capital gain tax. The IRS says you can if you reinvest all your money in a different country. So you will find a great property to reinvest all the money in and release yourself from paying any tax.
But to use this benefit, you must hold your first property for at least a year, sometimes two years, and buy a similar or higher price property to get this offer.
For example, if you have sold your first property for $100,000 (let’s say). You have to buy another property for $100,000 or more. You can not buy a property for $90,000 and have that $10,000 in your possession.
If you do, that $10,000 will become taxable, and you have to pay tax on that $10k. So buy similar or higher price property to use this amazing tax benefit.
Look, the government wants more affordable homes and more circulation of money in the market. That is why they give real estate investors some incentives to invest in those properties. But the property you are dealing with must be an investment property. Otherwise, you can not use this benefit.
Four Types of Property and How They Are Taxed
- The property owned for development is taxed as an ordinary income (the most tax).
- Short-term property is taxed as short-term capital gain (1 year)
- A personal residence is qualified for tax deduction but for marital status
- Investment property is the place where real tax advantages kick in.
As you can see, investment properties are the best to get tax benefits. Now I will share those six steps you need to make this tax exchange work.
The 6 Rules of 1031 Exchange
Follow these six rules line by line for your tax exchange and also if you dont want any trouble here.
- Hold the property for investment
- Identify your next property within 45 days
- Replace the property within 180 days
- Use an intermediary for better management
- Follow the Tile Holding requirement
- Buy equal, up, and reinvest all the money
Hire an expert to do this exchange because this is not easy. Now let’s see the timeline for the 1031 exchange more clearly.
The 1031 Exchange Timeline
The investor has 45 days to identify a potential replacement property and 180 days to acquire the replacement property. The exchange is completed within 180 days, not 45 days plus 180 days. Dont mix this up.
Although you can select up to 3 properties and buy one. But you have to report them all to the IRS if you do that. Here is the shortlist.
- Day 0: Close on your existing property and start looking for a new property.
- Day 45: Identify your next property within 45 days of selling your first property.
- Day 180: And then, within 180 days, buy the next property. Do not delay one single day. Do it before the time expires.
Take it seriously and with proper documentation. So you can proceed without any disputes.
1031 Tax Exchange in Different Counties
This exchange law is available in most democratic countries. All you have to do is to ask your agent or tax consultant to find this out. In some countries, the time limit is a little different, and the tax code is also.
You have to act according to your country’s law. This 1031 exchange tax code is only for the USA. Find your tax exchange law in your country, the process is almost the same. I guarantee that.
I am not a Tax Expert
Look, I am not a tax expert. I am just sharing how the 1031 exchange timeline works in the US. Hire a tax expert and keep yourself safe from all the legal problems that might occur if you do anything wrong.
So that is all for the 1031 tax exchange timeline. Hope now you know what it is and how much time you have to apply for it and get the tax benefit. Thanks for reading. See you soon.