1031 Tricks & Treats for 4th Quarter Transactions
As we head towards year’s end, real estate transactions structured as tax deferred 1031 Exchanges continue at a record pace. Here are some tricks and treats for fourth quarter transactions that may help your real estate sale enjoy sweet tax deferral:
1. If you are unsuccessful in locating new Replacement Property to complete your 1031, you may be eligible to delay payment of the taxes due for one year. When a 1031 Exchange is opened in the latter part of the year, a seasonal treat is “tax-straddling”. The treat for those taxpayers is that they may still qualify for a “mini-tax deferral” (where they can report and pay their taxes on their 2022 tax returns instead of immediately on their 2021 tax returns.
2. If you are completing a 1031 in the fourth quarter, do not file your 2021 income tax return until your exchange has been completed. Taxpayers are under the impression that they have 180 days from the sale of their old (Relinquished) property to purchase their new (Replacement) property. However, the regulation actually states that the time frame you have to complete the acquisition of your Replacement Property ends at midnight on the earlier of the 180th day after the date you transferred the Relinquished Property OR the due date (including extensions) for your income tax return for the taxable year in which the transfer of the Relinquished Property occurs. So, if the 180th day following the closing of your Relinquished Property falls after the due date for your 2021 tax return (this year, for most, April 15, 2022), you must file an application for extension of time with the IRS to extend the due date. If you do not file for an extension, you will NOT be able to acquire any Replacement Property in your exchange after your tax return due date.
3. Like kind does not mean “same”. Instead, “like kind” simply refers to the requirement that property “held for investment or for productive use in a trade or business” must be exchanged for other property that is also “held for investment or for productive use in a trade or business”. An apartment building may be exchanged for industrial property, a storage facility, a hotel, a fractional ownership of real estate, etc.
4. The only time that the 1031 deadlines to identify new property and complete an exchange can be extended is via a special notice by the IRS. These are typically related to weather disasters such as wildfires, hurricanes, and floods. The IRS will issue a “Disaster Relief Notice” and will post it on their website. FEMA notices do not extend 1031 deadlines.
5. You do not have to replace your debt on your new Replacement Property. Many taxpayers (and tax advisors) are under the misconception that the IRS mandates that they must have equal or greater debt on their 1031 Exchange Replacement Property (property they are purchasing). You do need to replace the VALUE of the debt paid off on the Relinquished Property. However, the debt does not have to be replaced with debt. The exchanger can always bring their own cash (from outside of the 1031 Exchange) to the closing table for the Replacement Property to offset any reduction in debt, or use other options.
Check with your favorite Tax Expert for your options.