Although IRC Section 1031 exchanges may seem simple, that’s not always the case. Understanding the nuances of Section 1031 can make or break the success of your exchange. Here’s one example of a common misconception that can disqualify an otherwise straightforward 1031 exchange: How many times have you heard that you have 6 months, or 180 days, to complete your exchange?
Wait … 180 days from when, exactly?
The exchange period is the period of time in which the taxpayer must acquire the replacement like-kind property that they’ve identified. The clock begins ticking on the day that the taxpayer sells their relinquished property and it stops at midnight on the earlier of:
- the 180th calendar day after the date of the sale, or
- the due date of their tax return, including extensions.
A good illustration of this problem is an individual taxpayer with an April 15th tax return filing deadline who sells their relinquished property on November 18th of the preceding year. This taxpayer’s exchange period will expire on midnight of April 15th (unless that date falls on a Saturday or Sunday), even though the 180th day is May 31st. To get the maximum 180 days, the taxpayer must file for an extension to file their tax return for the preceding year.
To avoid this issue, a good practice is to always compare the 180th day against the due date of your tax return shortly after the sale of the relinquished property. If the 180th day falls after your tax return deadline, inform your accountant or tax return preparer well in advance and closely monitor your exchange. If you think that you might need the full 180-day period, make sure that you file a request for an extension of the time to file your return no later than the standard due date.
Don’t make the mistake of thinking that the IRS doesn’t care much about these deadlines — they do. These deadlines are created by statute — they are the law. One taxpayer learned that the hard way when they filed their tax return on time, and even included a statement on their tax return that their relinquished property was the subject of a 1031 exchange that would be concluded and reported in the year following the sale. But they did not request an extension. Although all their purchases of replacement properties occurred within the 180-day period, the entire exchange was disqualified because none of the replacement properties were acquired on or before the tax return due date. Attempting to save their exchange, they took their case to the United States Tax Court, which decided in favor of the IRS, and then they appealed that decision to the U.S. Court of Appeals for the Ninth Circuit, which upheld the Tax Court’s decision.
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At NES Financial, we’ve put together an industry-leading track record of 1031 success, with tens of thousands of transactions and more than 25 years in the business. Our General Counsel developed significant IRC 1031 guidance while at the IRS National Office. And we’ve built a cutting-edge administration platform, called eSTAC®, from the ground up to maximize transaction security, transparency, and compliance.
If you’re considering a real estate exchange, you’ve come to the right place. Give us a call at 1-800-339-1031, or schedule a free consultation, with no obligation, by clicking below!