Owners who sell investment real estate in the fourth quarter and want to defer the gain through a Section 1031 like-kind exchange usually know the headline rules: 45 days to identify replacement property and 180 days to close on it. What gets less attention is that 180 days is not always 180 days. For a sale that closes late in the year, a different date can arrive first.
The Two Clocks
Under Treasury Regulation 1.1031(k)-1, the identification period ends at midnight on the 45th day after the owner transfers the property being sold. The exchange period ends at midnight on the earlier of two dates: the 180th day after the transfer, or the due date, including extensions, of the owner’s tax return for the year in which the transfer occurred. Both periods start on the closing date of the sale and run on calendar days.
A Year-End Example
Say an individual investor closes the sale of a property on December 1, 2026. Day 45 falls on January 15, 2027, which is the deadline to identify replacement property in writing. Day 180 falls on May 30, 2027. But the investor’s 2026 federal return is generally due April 15, 2027. Unless the investor files an extension, the exchange period ends on April 15 rather than May 30, which takes roughly six weeks off the window. Filing an extension generally preserves the full 180 days.
Owners who hold property through entities with earlier return due dates, such as many partnerships and S corporations whose returns are generally due March 15, can run into the same issue sooner. Whether and when to file an extension is a question for your CPA. The point is to decide before closing, not in April.
“Most 1031 problems are not complicated. They are calendar problems. The owners who do well are the ones who put the real dates on a calendar before the sale closes.” — Friedman Real Estate
Identifying Replacement Property
The identification has to be in writing, signed by the owner, and clear about which property is being identified. The regulations also limit how many properties can be identified. The most common approach is to identify up to three properties regardless of value, and other limits apply if more are identified. Owners often name a backup or two so that one deal falling through does not end the exchange.
If a deadline is missed, the exchange generally fails and the sale is treated as a taxable sale, with the gain that would have been deferred recognized in the year of the sale. That is why the calendar matters more than almost anything else in the process.
Other Rules Worth Knowing
- Real property only. Since 2018, like-kind exchange treatment applies to real property.
- Use a qualified intermediary. If a seller actually or constructively receives the sale proceeds before acquiring replacement property, gain may be recognized. That is why owners work with a qualified intermediary, engaged before the sale closes.
- The dates do not bend. The deadlines are calendar days, and relief is limited to narrow situations such as certain federally declared disasters.
Why to Start the Replacement Search Before You List
The 45-day clock starts at closing, not when you are ready. Owners who wait until after the sale closes to begin looking often end up choosing from whatever happens to be available. Starting earlier leaves time for due diligence, financing, and backup identifications. For investors who want a more passive form of ownership, single-tenant net leased properties are a common focus of replacement searches, because the tenant typically takes on operating costs and maintenance. Whether that fits depends on your goals, your tax situation, and your appetite for risk.
What to Do Before Year-End
- Talk to your CPA now about whether an exchange makes sense and about your return due date.
- Select a qualified intermediary before you list or close.
- Decide whether to file an extension, and put it on the calendar.
- Begin the replacement search before the sale closes.
- Write out the actual calendar dates for day 45 and day 180 and share them with everyone involved.
Friedman Real Estate is not a tax adviser, and this post is general information rather than tax or legal advice. Your CPA and qualified intermediary should guide the specifics of your situation.
