Have you been thinking of utilizing a 1031 exchange to sell your current commercial real estate but you’re not sure if your property qualifies and how long it will take? You’re not alone. We get asked these questions every day, so our team at Westwood Net Lease Advisors, who specializes in 1031s, thought we would give our readers a rundown on the types of properties you can exchange, and the timeline involved.
Does My Property Qualify for a 1031 Exchange?
The 1031 exchange section of the IRC states that you may invest profits from the sale of one investment property into one or more “like-kind” properties within 180-days and defer capital gains tax.
Like-kind is all property purchased for investment purposes that is similar in nature. You could exchange an apartment building for raw land or unimproved property for a NNN lease property. You could buy new retail construction or sell a residential rental (if it’s been an income property for at least two years) and buy two net-lease properties. So long as you reinvest the capital gains on a property that is equal to or greater in value, and wrap up the transaction within six months from the time you close the sale of your original property, your transaction should qualify for a 1031 (please consult with your CPA).
How Long Does a 1031 Exchange Really Take?
The first 45 days.
The best way to answer the question about how long a 1031 exchange really takes is to start with the rules, then share a few examples of the varied timelines.
The IRS only gives you 45 days after the sale of your old property to legally identify the new property you intend to purchase and/or complete the purchase of a new property. Because of this extremely tight timeline, it’s best to start the NNN investment process before you sell your property.
Our savvy investors contact us when they’re thinking of selling or have just begun the listing process. It takes time to narrow down exactly what type of asset class, tenant, and location will work for your financial and lifestyle objectives. NNN properties sell extremely fast and many never make it on the open market, so this extra time creates a buying opportunity and ensures you meet the IRS’s 45-day identification period as soon as you sell.
Within that 45 days, you must provide your qualified intermediary with a list of prospective properties, even if the forty-fifth day is on a Sunday or holiday. This list must be in writing and note each property’s address and/or legal description. It can include up to three properties without regard to total cost and more than three properties if their combined value is less than twice the value of the property you sold.
From Day 45 to Day 180 of the 1031 Exchange
It can take 5 days, 45 days, or all 180 days.
First, the IRS’s rules.
- You must complete your 1031 exchange within 180 days of selling your old property by purchasing one or more of the properties on your list.
- You cannot buy property as part of the exchange that is not on the 45-day identification list.
- The entire exchange must be completed in 180 days total, not 45 days plus 180 days.
The only exception to the 180-day rule is that the sale may be completed by the due date of your income tax return (with extensions) for the tax year in which the relinquished property was sold, whichever is earlier.
Now, real-life scenarios. The majority of our clients who proactively start the 1031 exchange process before they sell their original property meet and exceed this timeline. Typically, the NNN lease investments that we help our buyers purchase are familiar to us, so our representation speeds up the offer and contract process, due diligence, troubleshooting of any issues, and closing of the exchange.
Occasionally, we have a client who has been unlucky finding what he or she is looking for and comes to us with mere days to spare. We have identified and helped clients close on valuable NNN properties in as little as two days, sometimes five days, and other times we are down to the last minute on the 180th day at midnight. Generally, no matter when it is, we succeed in completing the 1031 exchange, and in turn, save our clients thousands or hundreds of thousands of dollars in tax-deferral.
1031 Exchange Expertise
When you engage a Westwood Net Lease Advisor with 1031 exchange expertise – at no cost to you – we take the anxiety of meeting the 1031 timeline off of your shoulders and alleviate the worry. We help you decide on the ideal property for your objectives, perform the property search and due diligence, and present your offer. We ensure you follow the letter of the law when it comes to the identification paperwork, choosing an intermediary according to the US Treasury Department guidelines, title requirements, financing, and so much more, all the way through closing.
To Wrap it Up – It’s Best to Know How Long the 1031 Exchange Takes & Be Proactive
As you can see, the 1031 exchange is a fast-paced, complex investment option. There are many variables that can come into play, and if you get a late start on the new property identification requirement, it makes for a stressful transaction. Additionally, missing the 1031 deadlines could needlessly take thousands of your hard-earned dollars in taxes, when instead, all your money could continue to work for you.