You’ve heard of the 45-day Identification Period deadline, and you know you should have 180 days total to complete your 1031 exchange, but did you know that your tax return due date could deny you a full 180-day Exchange Period?
Let's take a step back.
To properly complete a 1031 exchange, investors must meet two deadlines: the Identification Period deadline and the Exchange Period deadline.
To meet the Identification Period deadline, an investor must identify a list of potential replacement properties and provide that list to their qualified intermediary at or before midnight on the 45th calendar day after the close of the relinquished property sale transaction.
To meet the Exchange Period deadline, the investor must complete the acquisition transaction of the replacement property(ies) on or before the earlier of 1) midnight on the 180th calendar day after the close of the relinquished property sale transaction, or 2) the due date of their Federal income tax return for the year in which the relinquished property was sold.
If your Federal income tax returns for the year in which you sold the relinquished property are due before the 180-day Exchange Period deadline, then your Exchange Period deadline is the date in which your tax returns are due. Instead of a 180-day Exchange Period, you will have the total number of days that exist between the close of the sale transaction on your relinquished property and the due date of your tax returns, per the Dept of Treasury, Internal Revenue Service.
If your tax returns are due April 15th, this rule will affect you if you close on the sale transaction of a relinquished property on October 17th or any date through December 31st. If you close on these dates, then you will be required to complete your exchange on or before April 15th and will not be granted a full 180 days to complete the transaction.
However, there is a caveat. We would like to remind clients that the Federal income tax return due date may be flexible. If you file for a 6-month extension [on your tax return due date], then you would have more time to fulfill the whole 180-day [Exchange] Period.
The Exchange Period deadline rule applies to the date you must file your tax return for the year in which your relinquished property was sold. If you file for an extension on your tax return due date, then the original due date no longer impacts the deadline for your 1031 exchange. In most cases, the revised tax return due date will be after the 180th day following the sale of the relinquished property, and your Exchange Period deadline will then be determined by the 180-day rule. Please note, that an extension of your tax return due date does not also allow an extension of your Exchange Period beyond the 180-days.
Here are a few things to remember when calculating your deadlines. The deadlines are based on calendar days; there are no exceptions for weekends or holidays. If the sale transaction on a relinquished property closes June 30th, July 1st becomes the first day in the countdown to the deadlines, August 14th becomes the deadline for the Identification Period, and December 27th becomes the Exchange Period deadline. A failure to meet either of these deadlines would result in an invalid exchange, requiring the investor to pay the taxes owed on the capital gains earned from the sale of the relinquished property.
Don’t let your tax return due date catch you off guard. Prepare early and know your deadlines.
While the information provided above has been researched and is thought to be reasonable and accurate, 1031 Crowdfunding are not lawyers or tax professionals. It’s important to consult with a licensed tax professional regarding your personal tax situation.