Beware the Shortened Exchange Period
Real estate, legal and tax professionals are intimately familiar with the requirements under IRC Section 1031 that Replacement Property must be identified within 45 days after the date the Relinquished Property is transferred in the exchange. But overlooked occasionally is language from Section 1031(a)(3)(B) which defines the 180-day exchange period during the last quarter of the year.
THE EXCHANGE PERIOD COULD BE LESS THAN 180 DAYS
For taxpayers with an April 15th tax filing deadline selling Relinquished Property with closings between October 17, 2014 and December 31, 2014, the second provision noted above becomes critically important and, if ignored, could result in
a failed exchange. Section 1031 (a)(3)(B) requires that Replacement Property be acquired the earlier of:
§180 days after the date Relinquished Property is transferred in the exchange OR
§The due date (determined with regard to extensions) of the Taxpayer’s return for the taxable year in which the Relinquished Property is transferred.
FOR EXAMPLE…
Taxpayer sells investment property on November 1, 2014 and enters into
a tax-deferred exchange. On December 16, 2014 (45 days after November 1, 2014), Taxpayer identifies one Replacement Property…
THE SOLUTION
In order for the Taxpayer to have the full 180-day period to complete this exchange, he or she must request a filing extension for his or her 2014 return. If the Taxpayer fails to request an extension, the exchange period ends on the due date of Taxpayer's return (e.g., April 15, 2015). If the Taxpayer requests a filing extension, he or she has until April 30, 2015 to complete this exchange, 180 days after November 1, 2014.
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