Delayed 1031 Exchanges also called Starker Exchanges are the most common in real estate. Because real estate transactions are complex and often don’t go as planned the IRS allows 180 days for the exchange of real estate. If an investor sells an investment property and doesn’t purchase a replacement property within 180 days, he or she will have to pay capital gains taxes on the property sold. You always want the replacement property or properties identified prior to closing on the relinquished property to avoid the nullification for the exchange agreement.
- An investor sells an investment property and wants to defer taxes through a 1031 exchange. Prior to close the investor finds a qualified intermediary and executes an exchange agreement.
- The relinquished property is sold, technically by the qualified intermediary, who then holds the funds in escrow.
- The investor has 45 days from the sale of the relinquished property to identify a maximum of 3 potential replacement properties.
- The exchanger has 180 days to purchase (close on) a replacement property
- The qualified intermediary releases the escrow funds from the sale of the relinquished property for the purchase of the replacement property. Although the qualified intermediary is technically the seller and buyer, the deed and title for the replacement property are recorded in the exchanger’s name once the replacement transaction closes.
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