Real estate investors are increasingly leveraging the advantages of 1031 exchanges. A 1031 exchange is a potent tax-deferral strategy that enables investors to postpone capital gains tax obligations following the sale of an investment property by swapping their relinquished asset for a new one.
Often, adhering to strict timeframes is challenging during a 1031 exchange. The most stringent of timeframe rules is the 45-day rule, although it can be extended in certain specific circumstances.
In this article, we’ll explore the 1031 exchange 45-day rule extension to help you understand when you can take advantage of this unique opportunity.
Understanding the 1031 Exchange Window
Under normal circumstances, there are two narrow windows that 1031 exchanges must be executed within: the 45-day window and the 180-day window. The clock starts ticking on both when a 1031 exchange begins after the sale of the initial property.
- 45-Day Rule: The 45-day rule requires the investor to identify the replacement property within 45 days of the sale of the relinquished property. There are several ways to identify properties, as there are additional rules such as the three-property rule, the 200% rule, and the 95% rule.
- 180-Day Rule: The 180-day rule encompasses the entire 1031 exchange process and stipulates that the exchange must be completed within that window. The 180-day rule runs concurrently with the 45-day rule.
Both rules are crucial for completing 1031 exchanges; failing to meet either can disqualify the exchange. This means the investor will likely be responsible for paying the capital gains tax on their original property. The 45-day rule is particularly challenging, as the replacement property must be identified and submitted to the qualified intermediary (QI) overseeing the exchange.
The 1031 Exchange 45-Day Rule Extension
Some specific conditions can make investors eligible for a 1031 exchange 45-day rule extension. The 45-day window can be extended through a “disaster extension.” When a federally noted disaster, such as a wildfire, hurricane, or mudslide, occurs where the relinquished property is located, taxpayers may be eligible for additional extensions.
In late 2022, due to severe storms and flooding, the IRS granted an extension for a 1031 exchange for participants in select counties in California who initiated their exchanges between Nov. 24, 2022, and January 8, 2023.
- Contra Costa
- El Dorado
- Los Angeles
- San Benito
- San Bernadino
- San Diego
- San Francisco
- San Joaquin
- San Luis Obispo
- San Mateo
- Santa Barbara
- Santa Clara
- Santa Cruz
This extension effectively prolonged the 1031 exchange period until Nov. 16, 2023, depending on when the property was sold.
This is one example of how the IRS sometimes grants taxpayers a bit of leniency for the 45-day rule. These extensions can provide additional time to identify replacement properties and complete the exchange after a disaster.
For investors that missed this deadline or didn’t qualify for a “disaster extension,” the 45-day rule will still pose a hurdle they must overcome. However, investors can still take routes that make identifying a replacement property within 45 days less of a hassle.
Exchange Into One of Canyon View Capital’s Multifamily Properties
Whether or not you qualify for the 1031 exchange 45-day rule extension, teaming up with Canyon View Capital can streamline the process of identifying a replacement property. At CVC, we manage a portfolio of multifamily properties valued at over $1 billion1. When you partner with us, you exchange into one or more of our properties as tenants in common. This makes identifying suitable properties easier and allows you to benefit from continued passive rental income and other tax benefits, all without having to worry about managing properties yourself.
Still need more information on 1031 exchanges vs Opportunity Zone Funds?
1IRA, “IRS announces tax relief for victims of severe winter storms, flooding, and mudslides in California,” Jan. 10, 2022, irs.gov. Accessed Oct. 16, 2023.
2$1B figure based on aggregate value of all CVC-managed real estate investments valued as of March 31, 2023.
Gary Rauscher, President
When Gary joined CVC in 2007, he brought more than a decade of in-depth accounting and tax experience, first as a CPA, and later as the CFO for a venture capital fund. As President, Gary manages all property refinances, acquisitions, and dispositions. He works directly with banks, brokers, attorneys, and lenders to ensure a successful close for each CVC property. His knowledge of our funds’ complexity makes him a respected executive sounding board and an invaluable financial advisor.