Time Constraints Set by 1031 Exchange
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 662
By Ilyce R. Glink and Samuel J. Tamkin
Summary: The reader wants to use a 1031 exchange
for the sale of commercial property but is concerned about the tight time frames
outlined by the IRS. Sam and Ilyce explaing how a reverse exchange may be the
solution to the readers concerns.
Q: There seems to be significant time constraints involved in a 1031 tax-free
exchange for investment properties (45 days from the date of sale to locate
the property and 180 days to close).
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I’m wondering if I can buy a rental property first, then sell the old
rental property and at the time of the sale put the proceeds into the rental
I already own and still defer the capital gains.
A: Let’s clarify first what you are trying to do. In an ordinary transaction,
you would be attempting to sell one property and buy another. To defer any taxes,
you would employ what is customarily called a “1031 exchange” which
is also known as a Starker Trust. The “1031” number refers to the
provision of the Federal Income Tax Code that allows an owner of an investment
property to sell it for a “like kind” property within certain time
limits and defer the payment of any taxes on the sale of the first property.
You are correct, that upon the sale of the first property, you have 45 days
to designate a new replacement property, and you have (generally) 180 days from
the sale of the original property, to close on the purchase of the replacement
But if you have found a replacement property that you don’t want to lose
and don’t have a buyer for your current property, you have a problem.
Some time ago, a creative (and probably desperate) individual came up with the
idea of a “reverse exchange.”
In a reverse exchange, you use a company to buy the property for you. When
you sell your current property, you then buy the property held by the reverse
While the whole process seems simple, it can be quite complicated. You need
to find a company that has extensive knowledge in not only traditional 1031
exchanges but also in “reverse exchanges.” These companies can help
you through the process of setting up the transaction to help you defer taxes
on the sale of your property. In addition to seeking advice from these companies,
you may wish to consult with your tax advisor, if you have one.
Reverse exchanges are generally more expensive than standard 1031 exchanges,
and you may be required to pay additional fees and costs involved in the various
transactions. There are times when paying the capital gains taxes and other
taxes are cheaper than the costs of doing a reverse exchange.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com