Can the Time Period of a 1031 Like-Kind Exchange Be Extended?

Posted Dec 20, 2022

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A 1031 exchange is a tool that investors can use to defer the payment of capital gains taxes when they sell an investment property and reinvest in another. Because of that benefit, the rules governing 1031 exchanges are strict. For example, the IRS imposes tight timelines for completing the transactions.

  1. Potential replacement properties must be identified within 45 days of the sale of the asset to be replaced (also referred to as the relinquished property).
  2. The acquisition of replacement property must be completed within 180 days of the sale, including the 45-day identification period.

In addition to the deadlines, the IRS requires that taxpayers comply with other stipulations to complete a 1031 exchange successfully:

First, the investor may not have access to the proceeds from the sale during the acquisition period. To ensure this arms-length status, the investor must use a Qualified Intermediary (QI) to administer the exchange. The QI is responsible for the following:

  1. Maintaining the funds in a separate account not available to the investor.
  2. Receiving the formal identification of potential replacement properties in accordance with IRS rules.
  3. Managing the purchase of identified replacement property.
  4. Maintaining all necessary documentation of the transactions.


Second, the replacement property must be valued at least as much as the relinquished property, and the investor must identify potential acquisitions that match one of the following options:

  1. The investor may identify up to three potential acquisitions, with no limit on total value.
  2. The investor may identify more than three potential replacements, but the combined market value may not exceed 200 percent of the original sale.
  3. The investor may identify any number of properties with any individual or combined value but must then acquire at least 95 percent of the identified value.

Finally, the investor must replace the debt associated with the relinquished property in addition to the value. If the purchase price of the replacement is lower than the sales price of the relinquished asset, the remaining boot is taxable.

How can I get an extension on the timeline?

In most cases, you can’t get an extension. The 180-day timeline is final. The IRS did offer extended deadlines during the Covid-19 restrictions. If a target property is in an official disaster zone, the IRS may offer an extension to allow taxpayers extra time to determine the suitability of the identified property. The IRS uses Revenue Procedure 2018-58 to designate qualification for a disaster extension.

On the other hand, a taxpayer may need to request an extension for filing their taxes if the exchange period overlaps the filing deadline. For example, if the exchange period ends after the standard filing deadline, and the taxpayer has not acquired the replacement property in time to meet the filing deadline, they can file Form 4868 to request an extension for filing taxes.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. 

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