1031 Exchange Deadlines

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In general 1031 like-kind exchanges require that taxpayers follow strict rules that includes stringent deadlines. These deadlines are usually essential. Normally no good faith exceptions exist if a deadline is missed. 

1031 deadlines are defined within   Internal  Revenue Code (IRC), the tax laws created by the Internal Revenue Service (IRS). The code is basically organized according to topic. IRC section 1031 ("Section 1031") contains the underlying regulations which allow the exchange of like-kind real estate property to utilize tax deferral when gains are transferred to the exchange property. These regulations also define the two stages involved in every deferred exchange, known as the "identification period" and the  "exchange period."

The identification period starts on the day the relinquished property is transferred from the taxpayer to the buyer (the day the benefits and burdens of ownership transfer) and ends at midnight on the 45th calendar day  after that transfer. It is critical to understand exactly when the 45 day identification period begins and ends for your exchange. This will determine the exact date by which you must complete and deliver, in writing, the identification of you planned replacement property.

The exchange period generally begins on the day the legal ownership of the  relinquished property is transferred from the seller to the buyer, and ends at midnight, 180 calendar days thereafter.  However, as Section 1031's does contain a number of nuances to the period.

The exchange period begins on the same date as the identification period. They actually run concurrently. However, the exchange period ends at midnight upon the earlier of 180 calendar days after the  transfer of the relinquished property, or the due date of the exchanger's tax return (with extension) as "imposed by chapter 1 of subtitle A of  the Code for the taxable year in which the transfer of the relinquished  property occurs."

The bottom line is, if you  begin a 1031 exchange in the latter part of your tax year, you may not  have the full 180 calendar days unless you extend your tax return filing deadline.

Extensions of time sometimes also arise in the revenue code. Such extensions may occur by:

• Federally declared disasters
• Acts of terrorism
• Military actions

Specifically related to deferred like-kind exchanges, Revenue Procedure 2007-56  allowed extensions of both the 45-day identification and the 180-day completion deadlines. Taxpayers conducting like-kind exchanges are only allowed extensions if the Internal Revenue Service issues guidance or publishes notifications related to the three items listed above however. A proper notice/guidance issued by the Internal Revenue Service will:

• Define the affected taxpayers
• Detail what acts can be extended/postponed
• Describe the length of the extension
• Define the location of the disaster area

It is critical to understand the exchange deadlines.  As always, consult with your tax advisor and confirm your understanding of the like-kind exchange stages, their beginning and end dates, and any potential extensions of time that might be available.

References:

Knight v. C.I.R., T.C. Memo. 1998-107
Reg. Section 1.1031(k)-1(b)(1)(ii)
Reg. Section 1.1031(k)-1(b)(1)(i)
Reg. Section 1.1031(k)-1(b)(2)(i)(ii)
I.R.C. Section 7508A