The basics of like-kind exchanges are fairly easy to grasp. Generally speaking, most deferred 1031 exchanges are document driven processes involving a distinct set of forms, including:
- Exchange agreement
- Assignment agreements
- Notifications of assignment
- Formal identification forms
Beyond these required documents, correctly structured like-kind exchanges also demand that taxpayers adhere to a strict set of rules that include meeting stringent deadline requirements. These deadline requirements are generally absolute and no good faith exceptions exist if they are not met .1 Let's explore the 1031 exchange deadlines, what triggers them, and whether or not extensions exist for taxpayers who might have trouble meeting them.
These deadlines are clearly defined within Internal Revenue Code (IRC). The comprehensive set of tax laws created by the Internal Revenue Service (IRS). This code was enacted as Title 26 of the United States Code by Congress, and is sometimes also referred to as the Internal Revenue Title. The code is organized according to topic, and covers all relevant rules pertaining to income, gift, estate, sales, payroll and excise taxes. Internal Revenue Code Internal Revenue Code section 1031 ("Section 1031") underlying regulations which, in summary, state that in every like-kind exchange of property, the replacement property will be treated as like-kind to the relinquished property, IF the replacement property is both identified within the identification period and received by the end of the exchange period .2 These very same regulations go on to define the two stages/periods involved in every deferred exchange, known as the "identification period" and the "exchange period."
The identification period, more commonly known as the "45 Day ID period," starts on the day the relinquished property is transferred from the taxpayer to the buyer (the day the benefits and burdens of ownership transfer to the buyer) and ends at midnight on the 45th calendar day after that transfer.3 It's critical to understand exactly when the 45 day identification period begins and ends, as it will determine the exact date by which a taxpayer must complete and deliver, in writing, the identification of their planned replacement property.
The exchange period, also known as the "180 day completion period," is generally known to begin on the day the legal ownership of the relinquished property is transferred from the seller to the buyer and end at midnight, 180 calendar days thereafter. This general understanding is only half correct, as Section 1031's underlying regulations describe a more nuanced end date to this deadline.
In reality, the exchange period does indeed begin on the same date as the identification period and they run concurrently. However, the exchange period ends at midnight upon the earlier of 180 calendar days after the transfer of the relinquished property or the due date of the exchanger's tax return (with extension) as "imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs." 4
The bottom line is if you begin a 1031 exchange in the latter part of your tax year, you may not have the full 180 calendar days to complete the exchange. So, be sure to extend your tax return filing deadline to ensure that you have the opportunity to maximize the length exchange period.
Extension of the Identification and Exchange Periods
Extensions of time do exist for date driven acts within the Internal Revenue Code (IRC). The comprehensive set of tax laws created by the Internal Revenue Service (IRS). This code was enacted as Title 26 of the United States Code by Congress, and is sometimes also referred to as the Internal Revenue Title. The code is organized according to topic, and covers all relevant rules pertaining to income, gift, estate, sales, payroll and excise taxes. Internal Revenue Code Internal Revenue Code .5 These extensions are available for taxpayers affected by:
- Federally declared disasters
- Acts of terrorism
- Military actions
Specifically related to deferred like-kind exchanges, Revenue Procedure 2007-56 allows extensions of both the 45-day identification and the 180-day completion deadlines. (“Exchangor" or "Exchanger") Individual or entity desiring an exchange. Taxpayer s conducting like-kind exchanges are only allowed extensions if the Internal Revenue Service issues guidance or publishes notifications related to the three items listed above. The notice/guidance issued by the Internal Revenue Service will:
- Define affected taxpayers
- Detail what acts can be extended/postponed
- Describe the length of the extension
- Define the location of the disaster area
Whether you're just considering a like-kind exchange or you are currently in the middle of one, it's critical to understand the exchange deadlines. As always, be sure to consult with your tax advisor and confirm your understanding of the like-kind exchange stages, their beginning and end dates and any potential extensions of time that might be available to you.
1 Knight v. C.I.R., T.C. Memo. 1998-107
2 Reg. Section 1.1031(k)-1(b)(1)(ii)
3 Reg. Section 1.1031(k)-1(b)(1)(i)
4 Reg. Section 1.1031(k)-1(b)(2)(i)(ii)
Long, Jeremiah and Foster, Mary. Tax-Free Exchanges under §1031. Thompson Reuters: used as a critical source in the creation of this post.
5 I.R.C. Section 7508A