Betty Friant: So, Dwight. Thanks for taking the time to go over a critical part of the 1031 Exchange process.
Why is Mid-October such an important date in the 1031 exchange world? Dwight Kay: The IRS rules that govern 1031 Exchanges give us two dates to consider when doing a tax deferred 1031 exchange. One part of the rule states that you have to complete the acquisition of your replacement property by midnight on the 180th day after the date you transferred (closed the sale of) the relinquished property. The other rule says that you have to complete the acquisition of your replacement property on or before the due date (including extensions) for your income tax return for the taxable year in which the transfer of the relinquished property occurs.
That means if you file your income taxes on April 15th, your 1031 exchange window is closed. If you started your exchange after October 15th, you may not get the full 180 days from the sale of your old property to close on your new property or properties. Filing an extension may give you the time you need to finish out your exchange.
Friant: Where would we find that information in the IRS Code? Kay: You can google the U.S. Treasury Regulations and look at Section 1.1031(k)-1(b)(2). Your CPA, attorney, or the Qualified Intermediary doing your exchange can help you find the language and make sure you are staying within the rules along with providing you guidance about your particular situation.
Friant: What is the most important thing to remember about the time frame between October and December 31?
Kay: If your exchange is not completed by the due date of your tax return on April 15th — CONSIDER FILING AN EXTENSION with the guidance of your CPA and tax attorney. In other words, you must file for an extension, if you want to acquire any replacement property in your exchange after April 15th if you closed on your original property after October 15th. It’s very straightforward and must be strictly adhered to by taxpayers seeking tax deferral via a 1031 exchange.
Friant: Are there any exceptions?
Kay: There might be an exception if the President of the United States declared a natural disaster area that affected the properties or parties involved in the exchange transaction but we certainly can’t depend on that!
Friant: We know that the 45 day identification window and 180 days to settle on a replacement property can be very challenging when investing in real estate and DSTs provide a very workable solution. DSTs are pre-packaged properties with all the due diligence completed. Investors can invest in a slice or piece of the property and so diversify their real estate holdings. With a DST, investors are able to divide their investment dollars so that instead of investing in one property, they are able invest smaller amounts into several larger properties such as healthcare, apartment buildings, NNN retail, office, or industrial.
Kay: True … DST’s do offer investors a vehicle to mitigate the closing risk when buying a property via a 1031 exchange. A closing on a DST 1031 property can happen typically in as few as 3-5 days. Many investors use DST’s for their entire 1031 exchange while others use DST 1031 properties as backup properties on their identification form in case one or more of the other choices don’t make it to settlement. DSTs can also be used for any leftover cash or “boot” so that an investor’s entire exchange might be deferred.
Friant: So, since the dates in a 1031 exchange are so important, DSTs can be a very timely solution (no pun intended…)
Kay: That’s right. REMEMBER the magic day for 1031 exchanges comes around October 15th. Any one starting a 1031 exchange on that day or after MUST ask their CPA, attorney, or Qualified Intermediary for advice to make sure they don’t file a tax return too early which could end their exchange before they have completed their purchases.
Friant: Thanks for your time, Dwight. This is very valuable information.
Betty Friant, Senior Vice President overseeing the Washington DC office of Kay Properties recently interviewed CEO and Founder, Dwight Kay about a very important topic for anyone thinking of doing a 1031 exchange in the last quarter of the year.
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