In a 1031 Exchange, all investors must adhere to the 180-Day rule which states that the total transaction must be completed in 6 months or no more than 180 days. Regardless of the type of exchange, the 180-Day Rule always applies.
Not adhering to the 180-Day Rule presents problems for investors. Meet John, an Exchange Authority client. He identified a condominium under construction within 45 days of his sale. Unfortunately, the developer informed John that the condominium would not be completed and ready to close with the title passing within the 180-Day period. John, through no fault of his own, was prohibited from closing within 180 days and meeting the 180-Day Rule for 1031 Exchanges. When John’s circumstances changes, there was nothing the Exchange Authority could do to make the exchange happen, because the 180-Day rule was not followed. As a result, John was unable to achieve a successful 1031 Exchange for this property transaction.
The bottom line is, the 180-Day Rule is simple, straightforward and non negotiable.
Diving Deeper on the 180-Day Rule
The tax code is clear, Section §1031 of the tax code requires that the purchase and closing of one or more of the new properties must be one of the properties listed on the 45-day identification list. A new property may not be introduced after 45 days. These time frames run concurrently, therefore when the 45 days are up the taxpayer only has 135 days remaining to close. There are no extensions due to title defects or otherwise. A slow developer, as was the case in client John’s exchange, is no excuse. Closed means title is required to pass on or before the 180th day.
In addition, sellers cannot touch the money in between the sale of their old property and the purchase of their new property. By law the taxpayer must use an independent third party commonly known as an exchange accommodator and/or Qualified Intermediary to handle the change. The party who serves in this role cannot be someone with whom the taxpayer has a family relationship or alternatively a business relationship during the preceding two years.
The function of the exchange accommodator or qualified intermediary is to prepare the documents required by the IRS at the time of the sale of the old property and at the time of the purchase of the new property. The intermediary holds the proceeds of the sale in a separate account until the purchase of the new property is completed.
To see an infographic on How 1031 Exchanges Work and the 180-Day Rule, go to How 1031 Exchanges Work.