It's been a number of years since we visited this article and while the core of 1031 exchanges have not changed, it is important to remember the foundation to ensure compliance. Two separate deadlines drive the 1031 exchange process and they are covered at length below. Another important concept discussed is how the 180-day exchange period which can be affected by the due date of the taxpayers return, so be sure to take special consideration of that as you read through the article below.
Despite working with like-kind exchanges (LKEs) for a number of years, we never tire of discussing the basics. That’s because, despite structural intricacies, LKEs are, at their core, deadline and document driven. It’s these basics that build a strong foundation for understanding LKEs as they increase in complexity. For this month’s LKE tip, let’s consider some basics and focus on exchange deadlines.
LKEs generally consist of two separate deadlines:
The 45-day window is frequently referred to as the “identification period,” while the 180-day window is often called the “exchange period.” Note that both deadlines are triggered on the same date and run concurrently.
In a standard Delayed The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange (taxpayer sells first and buys at a later date), both deadlines are triggered on the date ownership of the relinquished property is transferred. Under the standard Reverse The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange structure (buy first, sell later), both deadlines are triggered on the initial ownership transfer date of the replacement property. However, for both types, the counting of days doesn’t actually begin until the day after ownership transfer occurs.
In order to complete a valid 1031 exchange, the replacement property must be both:
- properly identified by midnight on day 45 and
- received by midnight on day 180.
A couple other things to note:
- Both the 45- and 180-day deadlines include all calendar days, including weekends and holidays.
- The deadlines are absolute with extensions only allowed for:
Furthermore, as we approach the end of the calendar tax year, it is vital to fully understand the 180-day deadline. The regulations clearly specify the exchange period as:
“..the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) of the taxpayer’s return of the tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”
In short, if you are participating in a like-kind exchange, be sure to review the due date of your tax return and contemplate the need to apply for an extension of time to file. Otherwise, you might find yourself with an unexpectedly short exchange period.