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1031 EXCHANGE INFO
1031 Exchange describes a tax law that allows Investors to exchange certain investment properties with another party to legally defer the capital gains tax associated with the sale of an investment property. The tax code states: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment purposes if such property is exchanged solely for property of a like-kind which is to be held for either productive use in trade or business or for investment purposes."
Two requirements must be met to defer the capital gains tax: (a) the Exchanger must acquire like-kind replacement property and (b) the Exchanger cannot receive cash or other benefits (unless the Exchanger pays capital gains on his money).
In every other aspect the exchange is treated like a sale, requiring the opening of an escrow account and professional oversight to determine that all requirements are met under the tax laws.
(source: www.southlandtitle.com, "1031 Exchange")
IRS Code Section 1031 states that the replacement property must be acquired on or before the following dates:
1. 180 days from the date of the transfer of the relinquished property, or
2. The filing date the tax return is due for the tax year in which the relinquished property is transferred, typically April 15th (the taxpayer has the right to request an extension-not to exceed 180 days.)
For example, the taxpayer closed the relinquished property on Nov. 30th which caused a taxable event for that tax year. The replacement property must be acquired by the income tax filing due date (April 15). This would give the taxpayer only 135 days to complete the exchange.
So what does the taxpayer do?
If the taxpayer has not acquired the replacement property by the filing due date for the to return (April 15), s/he must file an extension using Form 4868 which extends the due date for the tax return until August 15th. This will allow the taxpayer, who began the exchange last in the tax year, the opportunity to utilize the full 180 days allowed by the IRS to complete the exchange.
When filing an extension to complete the exchange, estimated income tax on the extended tax return should be paid with the extension. The IRS can deny any extension to a taxpayer who does not pay the estimated tax liability by the due date of the return, not the extension due date. This would invalidate the 1031 tax deferred exchange transaction not completed by the due date.
(source: Exchange Resources, Inc. "1031 Exchange News")
For further questions and information, please contact Marisa Papitto at (619) 993 -1565.
Other Resources
Like-Kind Exchanges - Real Estate Tax Tips from IRS
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