A 1031 exchange is a valuable tool for real estate investors looking to shelter gains from the sale of their investment or business-use property.
1031 is a section of the tax code that essentially allows a taxpayer to defer the capital gains on the sale of investment or business-use property, provided they follow a few simple rules:
- To entirely defer capital gains, buy property(ies) equal to or higher than the relinquished property’s value
- Use a Qualified Intermediary
- Purchase property that is like-kind
- Identify replacement property(ies) within 45 days of closing on the sale of the relinquished property
- Complete the exchange by the earlier of either the due date of the taxpayer’s tax return (including extensions) or 180 days from closing on the sale of the relinquished property
Year-End 1031 Exchanges From Mid-October to December 31
Most taxpayers automatically get the benefit of the full 180-day 1031 exchange deadline. For those beginning a year-end 1031 exchange between mid-October and December 31, additional action is needed to take advantage of the full 180 days.
If the relinquished property was transferred between October 17 and December 31, you may request an extension to file your taxes. Otherwise, the income tax return would be due April 15 (March 15 for corporate and partnership taxpayers). This date would be the deadline for closing on all replacement property, even though it is less than 180 days. If the taxpayer wants to have the full 180 days, they must request an automatic extension of time to file their return.
Taxpayers should consult with their accountant well in advance to allow ample time to have a request for extension filed on their behalf. The extension request must be filed to receive the full 180-day timeframe of exchanges started more than 180 days before the year-end.
Taxpayers should avoid filing their taxes and then filing an amended return after completing the exchange.
For more information regarding 1031 exchanges, please contact Midland 1031.