The ability to defer the payment of taxes within the real estate sphere or within qualified retirement plans such as IRAs allows the investor to grow their wealth at an accelerated rate, thuis providing them with more capital and income at retirement. While many people do not gravitate towards real estate investing and prefer stocks, bonds and mutual funds, the 1031 exchange is the most patronized by real estate investors that want to tax defer the growth of their investments.
Before we delve into the article, we need to refresh our memories on 1031 exchanges. A 1031 exchange is a tax deferral strategy covered by the section 1031 of the IRS tax code that allows investors to defer the payment of taxes by reinvesting the proceeds of the sale of their old property into a new investment property.
While doing a 1031 exchange offers investors multiple benefits, it also comes with some serious rules and regulations that investors must take into consideration before and during a typical exchange. One of these rules and regulation is the IRS stipulated exchange timelines which requires investors to complete the exchange within 180 days. In this article, you will learn more about the 180 day exchange timeline.
Let’s get started!
What is the Closing Timeline on Relinquished Property?
According to IRS regulations regarding like-kind exchanges, there is no stipulated timeline on when to sell your relinquished property. You can sell your old property any time you deem fit. While the ability to sell at any time seems simple—it isn’t. The surest way to blow up a 1031 exchange is to sell it incorrectly.
IF YOU DON’T HIRE A QUALIFIED INTERMEDIARY ON THE SALE OF YOUR PROPERTY THE 1031 IS INVALID.
Hire one at least 1 week or two before you close on the sale of your property. They are tasked with receiving the proceeds of the sale, the accounting of the sale and the disbursements on buying the the subsequent property or DST. They are critical and run approximately $1,000 for their service. If you want to speak with some Qualified Intermediaries that we recommend, contact us.
You should also write down the date you sold your relinquished property and its details because you will need to include information about it on your Form 8824 or tax return.
What is the Timeline on Replacement Property?
Identifying and closing on the replacement property or properties are some of the challenges associated with doing a 1031 exchange. When exchanging your replacement property for a like-kind replacement property, there are several guidelines regarding the timeline.
When identifying a replacement property, the IRS requires that you identify up to three replacement properties within 45 day after the close of your relinquished property. Upon identifying the necessary properties, you must have it in writing, signed, and forwarded to your qualified intermediary. The written document should describe the property, its addresses, and type.
Another timeline you should take into consideration after identifying your replacement properties is the 180 days’ timeline. The IRS requires that taxpayers doing a 1031 exchange must close on the identified replacement properties within 180days from the date they sold their relinquished property.
However, the closing timeline (180 days) may be affected by the due date of your income tax return for the tax year the relinquished property was sold.
Can the Due Date of Your Income Tax Affect Your Exchange Timeline?
Yes, the tax filing date may affect your exchange timeline. If you are doing a 1031 exchange towards the end of the year, let’s say December 20th, you have 180 days or until your tax return date. For most taxpayers, April 15th is the date for filing their taxes to the IRS. So, even if the IRS tax code state 180 days, you may have less time on your side if your tax return date falls on April 15th. You should know these days to help you plan ahead or request for an extension on time.
Can I Get an Extension Regarding the Deadlines?
You may be eligible for 1031 exchange deadline extension under certain conditions. If there is a federally declared natural disaster or widespread disease plague, then you may be eligible for an extension. A good example is the IRS extension of the timeline during the Coronavirus Pandemic. Please confirm with your CPA to see if you are eligible for an extension.
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