The seller’s side of an exchange
A Section 1031 exchange lets you defer federal capital gains tax and depreciation recapture when you sell investment real estate and reinvest in other like-kind real property held for investment or business use. For most apartment owners the exchange has two halves: selling the building you own now, called the relinquished property, and buying one or more replacement properties.
This guide focuses on the first half. How you structure and time the sale of your apartment building sets up everything that follows, and mistakes made at the sale closing are often impossible to fix later.
The 45-day and 180-day rules
Two deadlines run from the day your relinquished property closes, and both count calendar days, including weekends and holidays.
- 45 days to identify: you must identify potential replacement properties in writing, following the identification rules, within 45 days of closing your sale.
- 180 days to close: you must acquire the replacement property within 180 days of the sale, or by the due date of your tax return for that year, including extensions, if that comes first.
- The periods run at the same time, not back to back. Day 45 and day 180 are both measured from the same sale closing.
- Extensions are very limited, generally tied to federally declared disasters, so plan as if the dates are fixed.
Why a qualified intermediary is essential
You cannot touch the sale proceeds. If the money is paid to you, or you have the right to receive it, the exchange generally fails. Instead, a qualified intermediary, sometimes called an exchange accommodator, is engaged before your sale closes. Your sale contract is assigned to the intermediary, the proceeds go directly to them at closing, and they later use those funds to acquire your replacement property.
Engage your intermediary early, ideally before you sign a purchase agreement, so the assignment language and closing instructions are in place. Your title or escrow company will coordinate with them, and your buyer will be asked to acknowledge the assignment. A buyer who has done this before will not slow anything down.
Timing is the real challenge
The hardest part of an exchange is often not the tax rules but the calendar. Once your building closes, you have 45 days to lock in targets in a competitive market. Many owners prefer to have a replacement property in view, or even under contract, before their sale closes, which means they need the sale closing date to be flexible.
That is where the choice of buyer matters. A buyer who insists on closing on a fixed date can force you into the identification window before you are ready. A buyer who can extend or delay closing lets you line up the replacement first and then close the sale when the pieces fit together.
How Skyline accommodates exchange timing
Skyline can accommodate 1031 exchange timing, including delayed closings that line up with your exchange. In practice that can mean negotiating a longer closing period, building in extension options, or scheduling closing once you have a replacement property identified or under contract. We cooperate with your qualified intermediary on the assignment and closing documents.
We state the proposed closing structure in the written LOI, so you can review it with your intermediary and CPA before you commit. We do not give tax advice, and your advisors should confirm that the timeline works for your specific exchange.
What else to plan for
To defer all of the tax, sellers generally need to buy replacement property of equal or greater value and reinvest all of the net proceeds. Cash you keep, or debt you pay off without replacing, may be taxable as boot. Selling costs, loan payoffs and prorations all affect how much you need to reinvest, so ask your CPA to model it before listing.
If an exchange does not make sense, it is still worth knowing your number. Long-term capital gains on real estate are generally taxed at 0%, 15% or 20% federally, with depreciation recapture taxed at up to 25% and a possible 3.8% net investment income tax for higher earners, plus any state tax.
