1031 Exchanges Started Later in the Year

Don’t Ruin Your 1031 Exchange.

Per Internal Revenue Code (IRC) Section 1031, an exchanger has 45 days to identify a replacement property and 180 days to close on it. Both timelines begin the day the investor closes on the relinquished property (transfer of ownership from seller to buyer). However, if an investor closes on the relinquished property between October 18 and December 31, 2022, the timelines are shortened.

Per Section 1031 (a)(3)(B), the replacement property must be purchased by the earlier of two possible dates:

•  180 days after the date the relinquished property is transferred in the exchange, OR

•  The due date (as determined with regard to extensions) of the taxpayer’s return for the taxable year in which the relinquished property is transferred.

Section 1031 (a)(3)(B) states that investors selling real estate after October 18, 2022 – regardless of the 180-day rule – must close on their replacement property on the due date of their tax return. In 2023, tax filing day is April 17th.

For example, an investor who closes on their relinquished property on December 16, 2022, must identify a replacement property 45 days later, by January 30, 2023. With the 180 day exchange period, the investor can assume they have until June 14, 2023 to close on the property. However, Section 1031 (a)(3)(B) shortens this exchange period, and the investor must close by their tax filing date.

Those with a prospective shortened exchange period for their close can file an extension for their 2022 return, expanding the period to close on the replacement property.

In the scenario above, if the investor extends the filing, they will have until June 14, 2023, to close on their replacement property.

For additional information on Section 1031 (a)(3)(B), please reach out to your tax professional for specific questions or contact the specialists here at Security 1st Exchange for assistance.