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Extending a 1031 exchange is a topic that often comes up when investors are concerned about meeting the strict timelines set by the IRS for completing a like-kind exchange. The 1031 exchange process is governed by specific rules, particularly regarding the identification and acquisition of replacement property. Here’s a detailed look at how these timelines work and what options you might have if you’re worried about meeting them.
Under Section 1031 of the Internal Revenue Code, a taxpayer must adhere to two critical deadlines to successfully complete a deferred exchange:
- 45-Day Identification Period: You must identify potential replacement properties within 45 days of transferring your relinquished property. This identification must be in writing, signed by you, and delivered to a person involved in the exchange, such as the qualified intermediary (QI).
- 180-Day Exchange Period: You must receive the replacement property by the earlier of 180 days after the transfer of the relinquished property or the due date of your tax return (including extensions) for the tax year in which the transfer occurred.
These deadlines are strict, and the IRS does not typically allow extensions. However, there are a few scenarios where the timeline might be adjusted:
- Presidentially Declared Disasters: If a natural disaster or other significant event leads to a presidentially declared disaster, the IRS may provide extensions for 1031 exchange deadlines. These extensions are not automatic and are typically announced by the IRS in response to specific events.
- Tax Return Extensions: While the 180-day period is fixed, you can extend your tax return filing deadline, which might give you more time to complete the exchange if the 180-day period ends after your original tax return due date. However, this does not extend the 180-day period itself.
- Reverse Exchanges: In some cases, a reverse exchange might be a viable alternative if you anticipate difficulty in meeting the standard timelines. In a reverse exchange, you acquire the replacement property before selling the relinquished property. This requires careful planning and the use of a qualified intermediary, like us at Deferred.com, to hold the replacement property temporarily.
Let’s illustrate this with an example:
Imagine you own a commercial property that you plan to sell for $500,000. You want to defer the capital gains tax by using a 1031 exchange to purchase a new property. You engage Deferred.com as your qualified intermediary to facilitate the exchange.
- On January 1, you sell your commercial property and the 45-day identification period begins. By February 15, you must identify potential replacement properties. You identify three properties, as allowed under the 3-property rule.
- By June 30, you must close on one of these identified properties to meet the 180-day deadline. If you find yourself unable to close by this date due to unforeseen circumstances, such as a delay in financing or issues with the property title, you might consider filing for an extension on your tax return to give yourself more time to complete the exchange, though this does not extend the 180-day period.
- If a natural disaster occurs in your area and the IRS announces an extension for 1031 exchanges, you may be granted additional time to complete the transaction.
At Deferred.com, we understand the complexities and pressures of meeting these deadlines. Our role as a qualified intermediary is to ensure that the exchange process is as smooth as possible, providing guidance and support throughout the transaction. While extensions are rare and specific, planning ahead and understanding your options can help you navigate the 1031 exchange process successfully.
Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.
Sources
- Goolsby v. Commissioner
- What To Do About Exchange Expenses in a Section 1031 Exchange? (Article)
- TAM 200039005 (Failed Reverse Exchanges)
- Rev. Rul. 2002-83 (Related Party Exchanges)
- Deferring Losses On The Sale of Property Using 1031 Exchanges
- 1.1031(k)–1 (IRS Code of Federal Regulations)
- TD 8535 (Like-Kind Exchanges of Real Property-Coordination with Section 453)
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