Extending 1031 Exchanges Time Limits

Section 1031 exchanges allow investors to exchange like-kind properties to defer capital gains taxes and can offer real tax benefits. But they also come with strict rules, such as time limits for completing the exchanges. Fortunately, a twist on Section 1031 exchanges could essentially double the length of a critical window, enabling the purchase of commercial real estate properties at reduced prices.

Section 1031 Exchanges Have Time Limits
Like-kind exchanges are named after the Internal Revenue Code section that allows you to exchange a business or investment property (called a relinquished property) for a replacement property of a like kind without initially recognizing any capital gain until you sell the replacement property. Since buyers and sellers’ timing are not always exact, the law allows a deferred exchange when you transfer a relinquished property before it is acquired.

In such cases, you must identify the replacement property within 45 days of the relinquished property’s transfer. The IRS has some rules to help with meeting the identification of the property, but the key is that the IRS is very strict on the time frame, so generally no extensions are granted. You must then acquire the replacement property within 180 days of the transfer, or by the due date of your tax return (including extensions) for the year in which the relinquished property is transferred. The requirements for the exchange must be met no later than the last business day prior to the deadline date.

The same time limits apply to reverse exchanges. In a reverse exchange, the replacement property is acquired first, and held by an exchange accommodation titleholder (the accommodator) before you transfer the property being relinquished.

How Section 1031 Exchanges Work
Imagine you decide to purchase a property in Florida for $450,000 in January 2013. You warehouse it with an accommodator so you can determine which property you’d like to sell to take advantage of the benefits of a reverse exchange. Within 45 days you identify a property in Michigan. In July 2013, within 180 days of warehousing the Florida replacement property, you sell the Michigan relinquished property for $1 million, completing the reverse exchange.

You begin executing a deferred exchange within 45 days of selling the Michigan property by identifying additional like-kind replacement properties to purchase with the remaining $550,000 of proceeds from the relinquished Michigan property.  And you have 180 days from the close on the Michigan property to close on one or more identified replacement properties. So, you don’t have to close on those properties and complete the deferred exchange until January 2014—nearly a year after you purchased the Florida property.

This may all sound a bit overwhelming and convoluted, but a 360-day forward and reverse exchange combination is completely attainable. The key is to ensure that you satisfy all of the requirements and guidelines for Section 1031 exchanges. Consulting with your adviser could get you the assets you need to save tax dollars. To fully understand how these laws may be relevant to your bottom line, please contact Larry Wood, CPA/CFP and Partner at DZH Phillips, one of the most competent and prestigious accounting firms on the west coast. Larry brings a wide breadth of experience to the table, with a particular emphasis on real estate and income tax planning. Click here to contact him to discuss your specific needs, or email him directly at LWood@Dzhphillips.com.

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