For the unfamiliar, a 1031 Tax Deferred Exchange is a key mechanism for taxpayers to maximize the sale of business and investment properties. For any current or aspiring real estate investor, this tool—found in Section 1031 of the Internal Revenue Code—is worth learning about.
According to IPX 1031, a Fortune 500 company that specializes solely in facilitating 1031 Tax Exchanges, a 1031 Exchange “offers taxpayers one of the last great opportunities to build wealth and save taxes. By completing a 1031 Exchange, the Taxpayer can dispose of investment or business-use assets, acquire replacement property and defer the tax that would ordinarily be due upon the sale.”
As the IRS explains it:
Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.
As described in this Investopedia article, certain time limits must be observed in a 1031 Exchange:
45 Day Rule
The first relates to the designation of a replacement property. Once the sale of your property occurs, the intermediary will receive the cash. You can’t receive the cash or it will spoil the 1031 treatment. Also, within 45 days of the sale of your property, you must designate the replacement property in writing to the intermediary, specifying the property that you want to acquire.
180-Day Rule
The second timing rule in a delayed exchange relates to closing. You must close on the new property within 180 days of the sale of the old property.
Thankfully, in response to natural disasters ravaging the country, the IRS has recently extended these deadlines. For example, on March 17, 2023, following severe winter storms, flooding, landslides and mudslides in California, the IRS released IRS Notice CA-2023-03, postponing tax deadlines until October 16, 2023. The IRS has also recently postponed deadlines in Mississippi, Georgia, Alabama, and elsewhere. A full list is available here.
