After you sell a property as part of a 1031 exchange, you have 180 days to purchase a replacement property – unless your tax return is due first.
Section 1031 like-kind exchanges have long been used by property owners to defer capital gains taxes on the sale of property by purchasing a like-kind property. However, Section 1031 can only help you to defer taxes if you follow the rules correctly. A failed 1031 exchange can result in a significant tax burden, so mistakes can be costly.
There are many important filing requirements that need to be heeded at tax time, but there is one crucial fact to keep in mind: if your property was sold during the fourth quarter of the previous calendar year, you may not have the full 180 days to complete your exchange.
What happens when the April tax deadline comes before your 180 days are up?
In a standard forward exchange, once your relinquished property is sold, you have 180 days to acquire your replacement property. In a reverse exchange, the replacement property is acquired first, and you have 180 days to sell your relinquished property. Either way, both the 45-day identification period and the 180-day acquisition deadline apply.
However, exchangers are not granted the full 180 days if the due date for their tax returns falls before the 180-day period is up.
Section 1031 explains this scenario by stating that the replacement property must be obtained by the earlier of these two dates:
- the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
- the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.
You have 180 days to purchase a replacement property, unless the due date for your tax return come first, in which case the exchange must be completed by the date your taxes are due. While most know April 15th as tax day, your due date may vary depending on the specific year in which you’re filing your tax return (for example, if April 15th falls on a weekend or holiday).
In a non-leap year, 180 days before April 15th is October 17th of the previous year. If the relinquished property was sold prior to that date, your 180 days will be up before your tax return is due, meaning the exchange should have already been completed by tax day. If you sold your property on or after January 1st, then the gain must be reported on next year’s taxes, and you’ll have the full 180 days to complete your exchange.
But if your property was sold between October 17th and December 31st, you’ll have to complete the exchange before your tax due date, even though this gives you less than 180 days. Many people don’t realize this, and may think they have more time to complete their exchanges than they actually do.
Some exchangers choose to schedule their exchanges for the end of the year to take advantage of tax straddling, a method that acts as a hedge against failed exchanges by ensuring the exchanger won’t take receipt of the sales proceeds until after the first of the year. While tax straddling can be a good backup plan, it gives the exchanger less time to successfully complete the exchange, which is why tax straddling can be a risky strategy.
How to give yourself more time to complete your 1031 exchange
While exchanges performed after October 17th (or whatever date is 180 days before tax day) aren’t given the full 180 days, there is an option for those who need more time: if you file for an extension for your federal taxes, you will receive the full 180 days to complete your 1031 exchange.
Section 1031 states that the due date for obtaining a replacement property is “determined with regard to extension.” That means that if you file for an extension, 180 days will again be the earlier of the two dates. So long as you complete the transaction within the 180-day time frame, you can report it on your taxes at the extension date.
Once you file your extension, you’ll still need to follow all Section 1031 rules to make sure your transaction qualifies as a like-kind exchange. One requirement is that the sale proceeds from the relinquished property must be held by a Qualified Intermediary (QI) until the exchange is complete.
By working with JTC as your QI, you’ll gain access to an experienced team that can help you navigate your unique exchange scenario, along with a cloud-based platform that gives you 24/7 access to exchange information from anywhere in the world. JTC has pioneered best practices for 1031 exchanges that provide the utmost in security for your funds, regulatory compliance to ensure adherence to Section 1031 rules, and transparency so you can monitor the progress of your exchange.
CTA: To learn more about JTC’s commitment to 1031 best practices, click here.