1031 EXCHANGE UPDATE: HOW TO AVOID A LITTLE-KNOWN TAX SEASON TRAP BY PRESERVING YOUR 180-DAY EXCHANGE PERIOD

IRC Section 1031 requires that exchanging taxpayers acquire all replacement property by the earlier of (i) 180 days from the sale of the relinquished property, or (ii) the Federal tax return due date for the year in which the exchange commenced. As a result, taxpayers with exchange transactions commencing in the 4th quarter of the calendar year, specifically those starting on or after October 18, 2022, may have less than 180 days to complete their exchange, unless they file for an extension with the IRS. After completing the exchange, taxpayers can then file their federal tax return and report their 1031 exchange transaction on IRS Form 8824 any time before their extended tax filing date.

Once a tax return is filed, it typically cannot be amended to include a 1031 exchange or add an extension of time to complete the exchange. If a taxpayer files a tax return prior to completing the exchange, the sale of the relinquished property should be reported as a taxable transaction.

For calendar year taxpayers, this issue generally applies to exchanges that were started after October 17th , and prior to the new year. For fiscal year taxpayers, the need to file for an extension may vary.  An earlier exchange start date of September 16th applies to business entities that are calendar year taxpayers due to file taxes by March 15th. The Treasury Regulations contain an example of a calendar year taxpayer that started an exchange in the 4th quarter of a tax year.

Exchangers are strongly encouraged to discuss this deadline issue and the effect of filing an extension with their tax advisors. Although there is no cost for obtaining extensions and they are liberally granted, filing for an extension does not extend the time to pay taxes owed. Therefore, estimated payments may be required to avoid interest and penalties, even if an extension is taken.

Please visit the IRS website for more information to File for an Extension:
https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return

Please also consult with your tax advisor regarding filing for an extension of your state tax returns. Legal 1031 does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction.

To assist with calculating your 45- and 180-day deadlines, please feel free to use our website’s Exchange Deadline Calculator.

 

Legal 1031 Exchange Services LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information. Unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended, or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

Copyright © 2023 Legal 1031 Exchange Services LLC. All rights reserved. No rights claimed with respect to public domain and fair use materials contained or linked in this article.