Can You Get an Extension on a 1031 Exchange?: A 1031 exchange offers taxpayers one of the last great chances to build wealth and save taxes. By completing a 1031 exchange, the taxpayer can sell business-use properties, acquire replacement property and suspend the tax that would usually be due upon the sale.
The 1031 exchange is great, but it also has some time restriction issues. Several exchangers are frustrated by the time limitations imposed by the regulations to section 1031. They find that the 45-day identification and the 180-day exchange period aren’t enough to find and close on their preferred property.
This article will answer the question, “can you get an extension on a 1031 exchange?” including what you need to know about the 1031 exchange.
What Is the 1031 Exchange?
A 1031 exchange is an exchange that occurs when a real estate investor sells one investment property to buy another. When swapping your present investment property for another, you’d generally be required to pay substantial capital gain taxes.
However, if this transaction qualifies as a 1031 exchange, you can suspend these taxes indefinitely, allowing real estate investors to move into a diverse class of real estate and shift their focus into a new location without getting hit with a huge tax burden.
The tax deferral is the major benefit of carrying out a 1031 exchange rather than merely selling one property and purchasing another. A 1031 exchange allows you to suspend capital gains tax, thus freeing more money for investment in the replacement property.
However, the 1031 exchange is reserved for real estate held for productive use in a trade or investment; any property held for investment purposes qualifies for the 1031 exchange, such as a vacant lot, an apartment building, a single-family residence, or even a commercial building. It’s essential to note that property held mainly for personal use doesn’t qualify for this exchange.
The 1031 exchange requires a relatively high minimum investment and holding period, making these transactions more suitable for individuals with a high net worth. Due to their complexity, 1031 exchange transactions should be handled by experts.
Types of 1031 Exchanges
There are four main types of 1031 exchanges that real estate investors can choose to execute:
A delayed exchange is the most widely used option because it offers you the flexibility of up to 180 days to buy a replacement property. Sales profits in delayed exchange go to your Qualified Intermediary if the relinquished property is sold before you procure the replacement property. The Qualified Intermediary holds the money until you procure the replacement property, before handing over the funds to the closing agent.
A reverse exchange involves closing on the acquisition of the replacement property before you close on the sale of the relinquished property. You may want to consider this alternative to get an enticing replacement property when it’s a seller’s market, particularly if you encounter competing offers or an urgent need to close quickly.
A simultaneous exchange involves buying and selling on the same day. It could be an actual trade of properties between two parties, although that direct swap isn’t common. This transaction still requires the service of either a Qualified Intermediary or another third-party to keep the individual from actually touching the exchange funds.
This Exchange isn’t common and is used when the individual needs to improve the new property before possession. The investor sells the relinquished property, identifies the replacement, and while the Qualified intermediary holds it, the improvements are carried out. However, the Qualified intermediary will pay for those improvements using profits from the sale of the relinquished property, while the individual takes possession when the work is done.
How Does a 1031 Exchange Work
A 1031 exchange can be difficult, so you’ll likely want to seek the services of a qualified tax pro. Here are the steps required for a 1031 exchange:
Pick the Property You Want to Buy and Sell
The property you’re selling, and the property you’re buying must be “like-kind,” which means they must be identical but not compulsorily the same grade or quality.
Choose a Qualified Intermediary
Working with a qualified intermediary is mandatory on a 1031 exchange. The qualified intermediary holds your funds in escrow for you until the exchange is finalized.
Inform the IRS About Your Transaction
You’ll need to inform the IRS about your transaction through IRS Form 8824 with your tax return. On that form, you’ll describe the real estate properties, provide a timeline, explain who was involved in the exchange, and write down the money involved.
1031 Exchange Extension
Completing a 1031 exchange transaction requires you to follow precise 1031 exchange deadlines under Section 1031 of the Internal Revenue Code, further interpreted within Section 1.1031 of the Department of the Treasury Regulations.
The 1031 exchange extension contains the 45 calendar day identification deadline and the 180 calendar day 1031 exchange completion period. Most people want their 1031 exchange deadline extended, which brings us to the question: Can you get an extension on a 1031 exchange?
Whether you’re interested in the 1031 exchange 180-day extension or the 1031 exchange 45-day extension, these due dates can’t be extended. In some cases, the President of the United States can grant a special extension if a natural disaster occurs in areas that affect the properties of one or both parties involved in the 1031 exchange transaction.
1031 Exchange Extension Coronavirus
Several people are wondering how COVID affected 1031 exchange timelines. On April 9th, 2020, the IRS published a notice to provide relief to United States citizens who had been affected by COVID. Within that notice was included the extension of some 1031 exchange deadlines for 2020.
The 45-day and 180-day exchange periods were increased by 120 days beyond the initial due date. This extension, however, ended on July 15th, 2020, and the IRS presently declares no further extensions for 1031 exchanges or any new 1031 exchange rules.
Most tax experts get questions like: can you get an extension on a 1031 exchange? Under normal circumstances, you can’t, but if several 1031 exchanges are affected by a federal pandemic like covid-19 or a natural disaster. In that case, there’s a high chance that the United States government will announce an extension if you, the relinquished property, the replacement property of the qualified intermediary, are in an affected area listed in the declared disaster.