1031 Exchange: The Two Key Timing Rules: 45-Day Identification Period and 180-Day Exchange Period

45-Day Identification Period

After the sale of the relinquished property, the taxpayer has exactly 45 days to identify potential replacement properties per Treasury Regulations §1.1031(k)-1(b)(2)(i). This 45-day window begins on the day the relinquished property closes. The identified replacement property must be "unambiguously described" by legal description, street address, or distinguishable name, and must be delivered to the qualified intermediary or another party as permitted under §1.1031(k)-1(c)(2).

The IRS provides the taxpayer with two primary options for identifying replacement properties:

• The Three-Property Rule: The taxpayer may identify up to three potential properties, regardless of their total fair market value per §1.1031(k)-1(c)(4)(i)(A).

• The 200% Rule: As an alternative, under §1.1031(k)-1(c)(4)(i)(B), the taxpayer may identify more than three properties, provided that the total aggregate fair market value of all identified properties does not exceed 200% of the value of the relinquished property.

  
  

Key Point: Per the Treasury Regulations, the identification must be made in writing and delivered by the 45th day. There are no extensions, even if the 45th day falls on a weekend or holiday. Failure to meet this deadline results in the loss of 1031 deferral benefits for that transaction.

180-Day Exchange Period

The second key timing rule is the 180-day exchange period, as outlined in §1.1031(k)-1(b)(2)(ii). The taxpayer has 180 days from the date of the relinquished property’s closing to complete the exchange by acquiring one or more of the identified replacement properties. This 180-day period runs concurrently with the 45-day identification period, meaning that if the taxpayer takes the full 45 days to identify replacement properties, only 135 days remain to close on the purchase of the replacement property.

Important Consideration: Under §1.1031(k)-1(b)(2)(ii), the 180-day deadline is firm. If the exchange is not completed within this period, the transaction fails to qualify for tax deferral. Additionally, the exchange must be completed either by the 180th day or by the due date of the taxpayer’s tax return for the year in which the relinquished property was sold, whichever occurs first. If the exchange spans tax years, the taxpayer may need to file for an extension to utilize the full 180 days.

By adhering to these strict timing rules, taxpayers can ensure that their 1031 exchange is properly executed, allowing them to defer capital gains taxes under the provisions of Section 1031 and the applicable Treasury Regulations.