Before we dive into the misconception of the 180-day rule, let’s review a few IRS requirements for a successful 1031 exchange.
Understanding the Definition of “Closing”
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 these requirements must be met to qualify as an official “closing” for a 1031 exchange.
45 - Day Rule & 180- Day Rule
These are critical deadlines. Both are considered hard deadlines with no exceptions or extensions. It is essential to understand the details thoroughly.
What is the 45-Day Rule?
It is the time to identify a property as a replacement without exception within 45 days or less after closing on your relinquished property or properties.
What is the 180 - Day Rule?
The 1031 exchange is governed by Section 1031 of the U.S. tax code. The code explains the steps you must take to complete the exchange.
The 180 - Rule states an investor must close on their replacement property 180 days from the day they closed on their relinquished property. The 180 days includes holidays and weekends. So, if the 180th day falls on either a weekend or Holiday you’ll need to plan accordingly. The 180 day-rule is set in stone.
Or
The Federal tax return due date for the tax year when relinquished property(ies) were first sold.
If the relinquished property was sold within 180 days of the Federal tax filing due date, an extension may be necessary. Then with an extension, the full 180-day window can be utilized.
This is where the misconception occurs.
If the closing date on your relinquished property falls between January 1st and midnight of October 20th, 2023, the second condition won’t come into plan.
However, if you close after October 20th, you now have less than 180 days to close. You may need to file an extension which will give you until October 16th, 2023.
Understanding these rules thoroughly, prior to the sale of your relinquished property will go a long way in avoiding issues that potentially can cause a ‘boot’.
A ‘boot’ is defined as the amount of dollars that did not successfully go through the 1031 exchange and potentially subject to capital gains as well depreciation recapture tax.
For more details, please visit my website and blog to read more about the 1031 requirements.
45 DAY - 180 Day Rules : L. TUCCI FINANCIAL LLC (ltuccifinancial.com)
‘1031 investing if for accredited investors only’