The long and the short of the answer is that once you have sold investment real property and taken constructive receipt of the funds, your window to delay taxation on that income is closed. Investment property is property you have purchased with the intention of earning a return on investment from rental or the future resale or both. This does not include your personal residence.
To be able to defer taxation on real property the IRS has laid out very specific rules and regulations. There are several key concepts that the investor needs to be aware of:
Qualified Intermediary
Identification period
Exchange Period
Who can be your Qualified Intermediary (QI)? A better question is who cannot be your QI. Your attorney, CPA or Real Estate Agent cannot be your QI if they have acted as your agent within the last 2 years. Most escrow or closing companies are well equipped to act as your QI and hold your money until the 2nd closing. A good QI will keep all the documents and signatures for you to properly document your 1031 exchange.
How long do I have to identify the replacement property. You must identify the acquisition target property within 45 days of closing the relinquished property. You should memorialize this date in notes, or even better let your QI know you have identified the target property and let them take note of the date if asked about the transaction by the IRS later. This is a hard 45 day limit
When must I close on the target property? The target property must have a closing date within 180 days of the closing date of the relinquished property or the due date of the tax return (including extensions), whichever is sooner. Alternatively there is Rev Proc 2007-56 with allows a 120 day extension if you fall within a Presidentially declared disaster area. This due date is viewed as a hard date and the IRS can disallow the deferral if missed.
If you want to defer the gain on investment property you must start the planning process before the close of the relinquished property. There are several intricacies not covered in this post and you should always consult your CPA.
Thanks for reading,
Todd Green CPA, CGMA
Green CPA, PLLC Blog 