Why the 45-Day Rule and 180-Day Rule...?

Why is there a 45-Day and 180-Day Rule for 1031 Exchanges?

Time for some 1031 Trivia!!

As you know, when performing a Section 1031 Like-Kind Exchange, you have 45 days to identify your New Property (calculated from the date of closing on the sale of your Old Property), and 180 days to close on the purchase of your New Property.

But, why did Congress choose these particular time deadlines? Unfortunately, the answer to this question is a bit esoteric. But, here are the answers -- for what they're worth!

The 180-day rule was Congress' response to the second Starker case (Starker v. U.S., 602 F.2d 1341 (9th Cir. 1979)). Starker is the seminal court case decided in 1979, which first allowed deferred, as compared to simultaneous, exchanges that we primarily see today. Starker upheld a five-year time period between selling the Old Property and buying the New Property! However, Congress decided that five years was way too long. The primary reason they originally passed Section 1031 -- the fact that the taxpayer's money is still tied up in the same type of investment -- was not served by the second Starker ruling. In addition, open-ended exchanges lasting for several years would create numerous administrative problems - How does the taxpayer report the exchange every year? How does the IRS track each open exchange? It's more likely that the exchanger dies during the exchange, etc. Therefore, Congress decided that 180-days were plenty long enough for a taxpayer to decide whether to continue his or her investment.

There is much less rationale given in the legislative history for the 45-day rule. In fact, there is virtually no rationale given whatsoever! We could venture some guesses, but our opinion is that the rule is likely arbitrary -- perhaps the result of Congressional negotiation.

Nevertheless, the 45- and 180-day rules are here to stay. So, follow them well, because while their reason for existence may be esoteric--and possibly even arbitrary--their effect is not. They are hard deadlines with no chance for an extension short of, literally, an Act of Congress!

--The Experts