In the complex navigation of 1031 exchanges of commercial real estate, the timing of ownership and execution of like-kind exchanges are among the top considerations. While 1031 exchanges themselves provide property owners with the flexibility to update their investment mix, the IRS allows very little leeway in terms of timing.
First, property owners must consider the amount of time they owned a property before selling it as a part of a 1031 exchange. While there is no specific law dictating a minimum or maximum time of ownership, best practices supported by several U.S. Tax Court decisions dictate that owners should hold a property for at least two years before selling it. This means that “flippers” may not qualify.
The next timing issue concerns the completion of the exchange. The requisite time to identify and close on replacement property is crucial. In many circumstances, a property owner will complete the sale and subsequent purchase of like-kind commercial real estate simultaneously. While this may be an ideal scenario, it is not always the most practical. For example, there are times when a seller will have a hard time finding a suitable replacement property or portfolio of properties in which to reinvest his or her sales proceeds. In these scenarios, sellers must know that they have 45 days after transferring a deed to a buyer to identify up to three possible replacement properties. Within 180 days of the deed transfer, or the due date of the seller’s tax return including any extensions, the seller must complete the purchase and take possession of the replacement property.
There are exceptions to these rules, including reverse exchanges which allow sellers more time provided they meet other criteria.
As tax laws continue to evolve, it is important to have the support of a team of experienced professionals who understand these complex processes and procedures and can help identify replacement property or properties in the allowable time frames.
The professionals with Orion Real Estate Group work with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation property management and disposition. For more information, call (305) 278-8400 or email firstname.lastname@example.org.