1031 Exchange Timing Rules Explained: Do You Need to File a Tax Extension?

Understanding 1031 exchange timing rules is critical if you’re selling property near year-end and want to avoid losing part of your 180-day exchange period.

IRC Section 1031 like-kind exchanges have long been used by property owners to defer capital gains taxes on the sale of business or investment property when they purchase like-kind property. However, Section 1031 can only help you to defer taxes if you follow the exchange timing rules correctly. A failed 1031 exchange can result in a significant tax burden, so mistakes can be costly.

There are many important filing requirements that need to be heeded at tax time, but there is one crucial fact to keep in mind: if your property was sold during the fourth quarter of the previous calendar year, you may not have the full 180 days to complete your exchange.

1031 Exchange Timing Rules Explained

In a standard forward 1031 exchange, once your relinquished property is sold, you have 180 days to acquire your replacement property. In a reverse 1031 exchange, the replacement property is acquired first, and you have 180 days to sell your relinquished property. Either way, both the 45-day identification period and the 180-day acquisition deadline apply, unless you qualify for some sort of exemption.

However, exchangers are not automatically granted the full 180 days if their tax return due date occurs before day 180 of the exchange.

Section 1031 requires that the replacement property must be acquired by whichever comes first:

• 180 days after the date the relinquished property is transferred, or
• the due date of the taxpayers return (including extensions) for the tax year in which the relinquished property was transferred.

Tip for investors: without a tax extension, the 1031 exchange deadline becomes your tax return due date.

You have 180 days to purchase a replacement property, unless your tax return is due sooner/ While most know April 15^th as tax day, the actual due day may shift if April 15^th falls on a weekend or a holiday.

Year-End 1031 Exchange Sales and the October 17^th Cutoff

In a non-leap year, 180 days before April 15^th is October 17^th of the previous year.

If you sell the relinquished property before October 17, you’ll have the full 180 days to complete your 1031 exchange.

• If you sell your property on or after January 1^st, then the gain will be reported on next year’s taxes, giving you the full 180 days to complete your 1031
• If you sell between October 17^th and December 31^st, your 1031 exchange deadline aligns with your tax filing deadline, which gives you less than 180 days.

Many investors don’t realize this and may think they have more time to complete their exchanges than they actually do.

Some taxpayers choose to schedule their exchanges for the end of the year to take advantage of tax straddling, a method that acts as a hedge against failed exchanges by ensuring the exchanger won’t take receipt of the sales proceeds until after the first of the year. While tax straddling can be a good backup plan, it gives the exchanger less time to successfully complete the exchange, which is why it can be a risky strategy.

How Filing a Tax Extension Preserves Your 1031 Exchange Timeline

While exchanges performed after October 17^th (or whatever date is 180 days before your tax return due date) aren’t given the full 180 days, there is an option for those who need more time: if you file for a federal tax extension, you will restore the full 180 day window to complete your 1031 exchange.

IRC Section 1031 states that the due date for obtaining a replacement property is “determined with regard to extension.” In practice, this means:

• If you file for a tax extension, day 180 becomes the earlier of the two deadlines (180 days or extended tax due date)
• Completing the exchange within this 180-day window allows you to report it on your taxes at the extension date.

Important Considerations When Filing a Tax Extension

Once you file your extension, you’ll still need to follow all Section 1031 rules to make sure your transaction qualifies as a like-kind exchange. One requirement is that the proceeds from the relinquished property sale must be held by a Qualified Intermediary (QI) until the exchange is complete.

While there are few requirements for acting as QI for an exchange, selecting whichever QI is closest to you or the one offering the cheapest service can lead to errors that may doom your exchange. Executing an exchange requires precision, as releasing funds too late or too early could mean violating 1031 rules and invalidating the exchange.

Why the Right QI Matters

By working with JTC as your QI, you’ll gain access to an experienced team that can help you navigate your unique exchange scenario, along with a cloud-based platform that gives you 24/7 access to exchange information from anywhere in the world.

JTC has pioneered best practices for 1031 exchanges that provide the utmost in security for your funds, regulatory compliance to ensure adherence to Section 1031 rules, and transparency so you can monitor the progress of your exchange. When it’s crunch time and you’re running up against the 1031 exchange deadline, you’ll be glad you chose a QI you can count on.

Learn more about JTC’s commitment to 1031 best practices and ensure your tax extension protects your full 180-day window.