End of Year Section 1031 Exchanges

November 17, 2015
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Section 1031 Exchanges

Section 1031 or like-kind exchanges have become commonplace and most accountants have one or more individual income tax returns where an exchange is reported. There are however an increasing number of taxpayers who believe they can prepare their personal or business entity returns. While this is not the norm, it prove fatal to the success of an exchange if one is not careful. Consider the following regulation.

 Treasury regulation for Section 1031 exchanges

Treasury Reg. § 1.1031(k)-1(b) (ii) – provides as follows: (ii) The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of the tax for the taxable year, in which the transfer of the relinquished property occurs.

What does this mean?

This means that you have 180 days after closing your relinquished property to complete your exchange unless your tax filing deadline (April 15th for most taxpayers) occurs first. In that case,  exchange period will expire on April 15th UNLESS you extend the deadline for filing your income tax return. That is, you reduce your 180 day period unless you file an extension. An exchange beginning with a sale of relinquished property on December 1st must be completed by April 15th of the following year, a period of only 146 days unless the taxpayer extends his or her return. Most readers will argue that most returns are extended because so much information is unavailable by April 15th and the problem will not arise. Perhaps, but we see more individuals seizing control of their filings relying on software as a substitute for professionals.