1031 Timeline and the Placed In Service Date

[Margaret Feit]

I am currently in my initial 45-day identification period for a 1031 exchange. I'm looking at a property that needs a total rehab and considering using my 1031 funds to purchase the property and then adding outside funds to complete the rehab. I would plan to take title within 180 days, but I'm not sure I could have the rehab all the way finished and the property placed in service within 180 days, possibly not even within this calendar/tax year. I understand that any purchase involving the 1031 funds needs to be identified within the 45 days and completed within 180 days, but if I am also using outside funds for additional work, does that all need to be completed within 180 days as well? Does the property need to be placed in service by that time? 

If I wasn't using 1031 exchange funds for a project like this, I would just keep track of my expenses and let them build up as basis until the property is placed in service, at which point I would start depreciation based on the basis at the time it's placed in service. I wouldn't report anything about the property on my tax returns until that time. In this case, if I complete a 1031 in 2025 (with the 180 days being completed in 2025 as well), but I don't actually put the replacement property in service until 2026, how does that work with the tax return and depreciation schedule? How would I account on the 2025 tax return for a property that exists in the exchange but hasn't been placed in service?