If your 1031 exchange began in late 2019, you may need to file for an extension of your tax deadline. This is because the normal exchange period of 180 days will be shortened to your tax filing day (April 15th with out an extension) if your surrendered property closed between October 19th and December 31st, 2019. Therefore, it is important to remember to file for an extension in order to protect your complete 180-day 1031 exchange period.
Why does this happen? The regulations outlined in Section 1031 state, “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”
To explain this a little better, your normal 180-day exchange period can be reduced if you began your 1031 exchange after October 19th, 2019. If you are unable to purchase a like-kind replacement property before the deadline of April 15th, you should consider filing a tax extension in order to allow yourself the full 180 days.
How this Works
For example, Mr. Jones sells Vista Apartment Complex as part of a 1031 Exchange on November 26, 2019. Although the 180th day after this sale of his relinquished property is May 24, 2020 – his tax filing deadline occurs before this and automatically becomes his 1031 Exchange deadline as well. By filing an extension to his tax return, Mr. Jones can extend both his tax filing deadline and revert his 1031 Exchange deadline to the full 180-day exchange period.
Therefore, if your relinquished property closed between October 19th and December 31st, 2019, it’s important to file for an extension on or by April 15th, 2020. This will ensure you don’t lose out on your full 180-day 1031 exchange period.
To determine if the exchange you initiated in 2019 has a 180 day deadline after April 15th, use my 1031 exchange deadline calculator at The 1031 Investor.
To get more information about how to file for an extension, check out the IRS website for complete instructions.
If you have several different investment properties, it may be beneficial for you to sell them and invest in a larger property with a consolidation 1031 exchange. If you have been focusing on single family rentals, for example, you may own quite a few smaller properties. But, this can leave you spread over a large area trying to maintain multiple locations. What if you could exchange all of those properties for one large unit such as an office building? The good news is, with consolidation 1031 exchanges, you can!
What is a Consolidation 1031 Exchange?
To put it simply, a consolidation 1031 exchange starts with the sale of investment real estate and ends with the purchase of investment real estate. As long as the property valuations work out, consolidation 1031 exchanges allow you to sell multiple units and combine their value into a larger purchase.
For example, if you have four single-family homes selling for $250,000 each, they could be sold and combined to purchase a property worth $1 million. This does require additional planning as the timing of your sales and replacement purchase must fall within the IRS mandated time frames. Coordinating extended and/or rapid closings with your purchasers and entering into a contract on your replacement property may require extra effort and negotiation.
Why do I need a Consolidation Exchange?
One of the main benefits of using a consolidation 1031 exchange is the deferment of taxes. Typically, when you sell your investment property, any gain is subject to taxation. Also, whether or not you took advantage of the available depreciation deductions while you owned the property, you will still be subject to “depreciation recapture” taxes. However, this is not the case when using a 1031 exchange.
Consolidation 1031 Exchange Example
Some clients of mine recently completed a consolidation 1031 exchange. They sold three properties in the Midwest and replaced them with one higher value vacation rental property in California. First, they identified both their replacement property. Then, they found a purchaser for all three of their original rentals. Then they sold the three original rentals over the course of three weeks. They purchased their replacement property just three weeks later. Not all transactions will happen as neatly or swiftly as theirs, but it is an indication of what advance planning can accomplish.
Consolidation Can Add Up
When you use a consolidation 1031 exchange, you can sell your investment real estate and purchase replacement investment real estate while indefinitely deferring payment of the tax that would normally be due on the sale. This can significantly increase your buying power as well as your opportunities for compound growth and reinvestment.
Aside from the obvious benefits of having year-round sunshine and beach access, Florida also has the benefit of being a very tax-friendly state. With no income tax and waterfront views at a lower price, it is easy to see why New Yorkers are fleeing the frozen north. According to Businessinsider.com, millionaires from New York can save more than one million in taxes by relocating to Florida. In fact, mansion sales are on the rise in Florida. Florida has certainly come out quite nicely as a result of the recent tax cuts.
Think tax-deferred 1031 Exchanges of real estate are too new, sketchy or scary to try? Every week, I talk to investors just like you who are surprised to learn that:
- 1. 1031 Exchanges have been around longer than IRAs and 401(k)s;
- 2. 1031 Exchanges are 100% legal; and,
- 3. 1031 Exchanges can be completed by novice investors.
Here are some myths I confront every day:
Myth #1: 1031 Exchanges Are Too New To Be Trusted
In 1921, Congress enacted The Revenue Act which authorized the exchange of like-kind property without paying tax. It was added to the Internal Revenue Code (IRC) Section 1031 and “1031 Exchanges” were born.
These transactions were originally used by cash-poor farmers to allow for the “exchange” of investment real estate without paying tax on the gain. In the intervening 98 years, IRC 1031 rules and regulations have evolved to serve today’s real estate investors. As we approach the 100th anniversary of 1031 Exchanges, the myth of their novelty should be retired.
Myth #2: 1031 Exchanges Are Sketchy
1031 Exchanges are not a “tax loophole”. Like your 401k or IRA, the tax deferral benefits of a 1031 Exchange are government endorsed and sponsored. As times have changed, the ways in which 1031 Exchanges can be successfully conducted have been both clarified and refined. Your 1031 Exchange qualified intermediary can guide you through the specific steps of this legal transaction.
Myth #3: 1031 Exchanges Are Scary
Most investors I talk to tend to be annoyed by the restrictions imposed on their IRA or 401(k) rather than fearful of the tax-deferred retirement provisions in the law. Same with 1031 Exchanges – there are specific rules and regulations. Some of these are maddening and some of them are pesky, but millions of investors have navigated them successfully. If you have never completed a 1031 Exchange, don’t be put off or intimidated by unfamiliarity.
In the course of your real estate investing career, you may find yourself selling your appreciated or depreciated investment real estate and purchasing replacement investment real estate. Why not keep your taxes working for you in that transaction? Follow the 1031 Exchange rules and regulations and you can indefinitely defer payment of the tax that would normally be due on sale and grow your portfolio using Uncle Sam’s money. Its time tested, legal and entirely within your capabilities.
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The IRS statute requires that you use a qualified intermediary (QI) to perform your 1031 exchange. While it is possible for an attorney to provide this service, it doesn’t have to be an attorney and it can’t be an attorney you have utilized for any other matters. This is because the IRS statute also requires […]
Tenants In Common (TIC) is a wonderful little arrangement wherein multiple owners each have a deeded interest in a property. That interest is a percentage or portion of the property. But can investors who hold an investment as Tenant in Common still take advantage of a tax deferred 1031 Exchange?
Long answer short: YES! When you sell your TIC, you can each decide what you want to do with your slice of the pie.
- You can stay together as one 1031 Exchange or
- You can 1031 Exchange your portion while the other(s) to take cash or
- You can each do a 1031 Exchange into separate properties with your portion.
You’ve got great flexibility in how you transition out of a property held as tenants in common. Because each situation and investor has unique circumstances, always consult with your financial adviser before proceeding.