End of Year 1031 Tax Exchange Real Estate selling Issues

There are two issues that come up toward the end of the calendar year relating to 1031 Exchanges.  The first has to do with the time allocated to complete the 1031 Exchange.

Issue #1
The tax code requires that a 1031 Exchange be completed within 180 days after the sale of the exchanged property or by the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier.

This means that if you started a 1031 Exchange in the latter part of 2016 and haven’t completed the purchase of replacement property by April 15th of 2017, you will need to file an extension on your taxes.

Issue #2
For a failed exchange that spans two different calendar years, investors may have a choice on when to pay capital gain taxes.

For example, let’s assume the relinquished property closes escrow on December 12th, 2016 and as of the 45th day of the exchange, the investor has not located suitable replacement property and cancels the exchange.  The sale proceeds will be returned to the investor in 2017 (on the 46th day of the exchange).

The investor now has the option to recognize the tax liability either:

a) in 2016, the year the relinquished property sold or
b) in 2017, the year the investor had the right to access and receive the benefit of the sale proceeds.

One thing to keep in mind is that in a failed exchange, depreciation recapture tax liabilities are always taxable in the year in which the relinquished property was sold.

If you’d like to discuss a 1031 Exchange either of these year end 1031 Exchange issues, please feel free to contact us.

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