After you sell a property as part of a 1031 exchange, you have 180 days to purchase a replacement property – unless your tax return is due first.
Like-kind exchanges under section 1031 have long been used by investors to defer capital gains taxes on the sale of a property by purchasing a like-kind property. Deferring taxes does not mean avoiding them altogether, but 1031 can be a smart strategy for many investors as they look build wealth. However, 1031 can only help you to defer taxes if you follow the rules correctly.
There are many important filing requirements that need to be heeded at tax time, but there is one crucial fact to keep in mind: if your property was sold during the fourth quarter of 2021, you may not have the full 180 days to complete your exchange. Whether this affects you depends on your date of sale.
If you want to perform a 1031 exchange, you don’t have to secure both a new property to purchase and a buyer for the property you wish to sell at the same time. Instead, you have 180 days from the date of the first transaction to complete the second, giving you time to perform all necessary due diligence.
After selling your relinquished property, you must complete the purchase of your replacement property within the 180-day time frame, or you’ll owe capital gains taxes on the sale when your taxes are due.
What if the April tax deadline comes before your 180 days are up?
Section 1031 explains this scenario by stating that the replacement property must be obtained by the earlier of these two dates:
(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
(ii) the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.
You have 180 days to purchase a replacement property, unless the due date for your tax return is earlier, in which case the exchange must be completed by the date your taxes are due. While most know April 15th as tax day, your due date may vary depending on the year and where you live.
In 2022, most Americans’ tax returns are due on April 18th due to Emancipation Day, while those in Maine and Massachusetts have until April 19th, and certain areas affected by natural disasters have until May 16th.
If, like most Americans, your tax returns is due on April 18th, the key date is 180 days prior, which is October 20th, 2021. If you sold your relinquished property prior to that date, your 180 days will be up before your tax return is due, meaning the exchange should have already been completed by tax day. If you sold your property on or after January 1st, 2022, then the gain must be reported on next year’s taxes, and you’ll have the full 180 days to complete your exchange.
But if your property was sold between October 20th and December 31st, you’ll have to complete the exchange before your tax due date, even though this gives you less than 180 days. That’s why it’s important to know both the date of sale and the date your taxes are due, as they will affect how long you have to acquire your replacement property.
The key here is that if you sold your relinquished property in 2021, the gain falls under your 2021 tax return and must be reported, which is why the exchange must be completed before your tax return is filed. Many people don’t realize this, and may think they have more time to complete their exchanges than they actually do.
That’s the bad news. The good news? There’s a solution, so long as you act now: if you file for an extension for your US taxes, you will receive the full 180 days to complete your 1031 exchange.
Section 1031 states that the due date for obtaining a replacement property is “determined with regard to extension.” That means that if you file for an extension, 180 days will again be the earlier of the two dates. So long as you complete the transaction within the 180-day time frame, you can report it on your taxes at the extension date.
Once you file your extension, you’ll still need to follow all rules regarding Section 1031 to make sure your transaction qualifies as a like-kind exchange. One requirement is that the sale proceeds from the relinquished property must be held by a Qualified Intermediary until the exchange is complete.
JTC Americas has decades of experience as a QI and employs industry-leading technology that maximizes transaction security and transparency. Our client services team is supported by an award-winning cloud-based platform that allows for 24/7 monitoring and customized reports, helping you ensure compliance throughout the 1031 life cycle.
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Want to learn more about 1031 Exchanges? Visit our 1031 Exchange Guide