Important Information to Know Before Filing Your Taxes
YOU MAY NEED TO FILE FOR AN EXTENSION
A 1031 exchange is reported on the tax return for the tax year in which the exchange begins, i.e. the tax year the relinquished property is transferred, using IRS Form 8824. The exchange period is the shorter of 180 days or the due date of the taxpayer’s tax return. If taxpayers' exchange transactions start late in the year, they may need to file for an extension using Form 4868 or Form 7044, depending on the type of taxpayer, in order to receive the full benefit of the 180-day exchange period and reflect the entire exchange on the appropriate tax return.
FILING AN EXTENSION TO GET THE FULL BENEFIT OF THE 180-DAY EXCHANGE PERIOD
In a 1031 exchange, the taxpayer must acquire all replacement property by the earlier of the date that is 180 days from the date the relinquished property closes, or the date the tax return for the year in which the relinquished property closed is due, including extensions. This means that for exchanges where the relinquished property closes late in the year, a calendar-year taxpayer must get an extension of the tax filing deadline in order to benefit from the full 180-day exchange period. For example, if the relinquished property closes on December 1, 2022, and the taxpayer does not get an extension on the filing of his return, the taxpayer will only have until April 18, 2023 to acquire all replacement properties. If taxpayers gets an extension, however, they will have until May 30, 2023 to acquire all replacement properties.
If the exchange is incomplete, the sale will need to be reported as a taxable event.
WHEN YOU WANT THE EXCHANGE PERIOD TO EXPIRE EARLY
There may be some situations in which the taxpayer benefits from a shorter exchange period. For example, sometimes exchanges are started late in the year and completed the next year before April 18th. The investor may have identified three replacement properties and acquired one, but there is still some available cash. The qualified intermediary is required to hold the remaining cash until the sooner of when all replacement properties are acquired or the end of the exchange period. In order to get his cash early, an investor can decide not to file an extension. In that case, the exchange period will end on April 18th, and the intermediary will be able to release any additional funds on the following day. If the taxpayer were to instead get an extension to the filing date of his tax return, the intermediary would be required to hold all remaining funds until day 181 of the exchange.
REPORTING AN INCOMPLETE OR FAILED EXCHANGE
Sometimes an investor starts an exchange but is unable to acquire any replacement property. Other times an investor may acquire some replacement property but have remaining cash which will be taxable. In both of those situations, if the investor starts the exchange in one year and receives the money in the following year, the boot received can be treated like an installment sale. In other words, any cash received in the second year can be reported in that year rather than the year the relinquished property closed.
If an investor completes more than one like-kind exchange during the tax filing year, he can file a summary Form 8824 and attach his own statement showing all of the information requested on Form 8824 for each exchange.
Certain rules may apply to your particular exchange transaction. For example, if you transferred your relinquished property to a related party as part of your 1031 exchange, you must file Form 8824 with your tax return for not only that year, but for the two years following the exchange. For taxpayers who are subject to filing a state tax return, you must comply with that state’s filing requirements. Also, additional filing requirements may apply to certain specialized transactions such as reverse exchanges or multi-asset exchanges.
Always check with your tax advisor to make sure you are complying with the requirements for your unique transaction.
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First American Exchange Company, LLC, a Qualified Intermediary, is not a financial or real estate broker, agent or salesperson, and is precluded from giving financial, real estate, tax or legal advice. Consult with your financial, real estate, tax or legal advisor about your specific circumstances. First American Exchange Company, LLC makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, and First American Exchange Company are registered trademarks or trademarks of First American Financial Corporation and/or its affiliates.