On April 9, 2020 the IRS issued Notice 2020-23, extending a variety of deadlines, including 1031 deadlines. The Notice extends any 45-day or 180-day deadline that occurs between April 1 and July 14, to July 15, 2020.
Here are two examples to illustrate the current extension.
Example 1: Exchange began April 5, 2020. 45th day is May 20,2020 which would be extended to July 15, 2020. Taxpayer must still close on replacement property by October 3,2020 which is the 180th day; because October 3, 2020 is after the last day of the disaster period (July 15, 2020).
Example 2: Exchange began December 31, 2019, 45th day is February 14, 2020. ID period is not extended because it is before April 1. The 180th day is June 28,2020 which would be extended to July 15, 2020.
Since 1921 and as amended in 1954, under Section 1031 of the Internal Revenue Code, investment or business property owners, through the use of a Qualified Intermediary (QI), can sell one property and purchase another property or multiple properties without incurring a current income tax liability. The property owner’s cash flow is improved by postponing the tax obligation and interest is earned on the sale proceeds until the new purchase is made.
While a 1031 Like-Kind Exchange can clearly be of great benefit to an owner of real estate, it does have fairly strict rules as to what types of transactions qualify and how they must be executed. If you receive cash, debt relief (i.e. debt paid when property sold) or property that is not like-kind, you may incur taxable gain in the year of the exchange.
You can exchange a single property for multiple properties, or purchase one property from the proceeds of several. Proceeds not used to purchase new investment property are taxed.
A 1031 Like-Kind Exchange must be completed within 180 days. There are three basic steps to the process:
Before the sale of the property, the property owner must retain a Qualified Intermediary (QI), which acts as a fiduciary to receive the proceeds directly from the sale.
Within 45 days after the sale, the property owner must identify the property (or properties) to be purchased. The identification is made to the QI in writing.
The property owner must close title on the replacement property within 180 days following the sale of the relinquished property.
The benefits of 1031 Like-Kind Exchanges are many. Some of them include:
Curchin 1031 Exchange, LLC acts only as a Qualified Intermediary. Please consult with your tax advisor for any tax related questions.
1. Can I sell a primary residence and use 1031 to avoid tax?
No. 1031 is limited to investment and business property. However, Internal Revenue Code Section 121 allows homeowners to avoid tax on realized gains of $250,000 ($500,000 for married taxpayers) when a primary residence is sold.
2. Can Section 1031 be used for sales other than real estate?
The Tax Cut and Jobs Act that took effect on January 1, 2018, retains Section 1031 for real estate exchanges. However, Section 1031 may no longer be utilized to defer taxes for transactions involving personal property. Real estate exchanges are subject to the same rules and regulations as under previous law. The 45 day identification and 180 day exchange periods remain unchanged. Section 1031 only applies to domestic real estate.
3. What about stocks? Can I sell Facebook stock and replace it with Google stock?
4. What should I do if I don’t want to buy real estate with my sale proceeds?
It is possible to buy fractional interests in real estate, known as a Tenancy In Common (TIC), as a replacement. The TIC investment avoids management and other direct ownership disadvantages. In addition, a Delaware Statutory Trust (DST) is also an option.
5. If I have a mortgage on the property being sold, how much do I need to invest in replacement property to avoid tax?
There is considerable confusion on this question. It is necessary to reinvest the net selling price in order to avoid tax. Net selling price is the sale price of relinquished property less certain qualifying closing costs. For example, if the sale price of the relinquished property is $1 million and qualifying closing costs are $50,000, replacement property for $$950,000 must be purchased to completely defer tax liability. If the property sold is mortgaged for $500,000 and only $500,000 of cash is generated at the closing, the seller still must spend at least $950,000 on replacement property (or properties) which means a mortgage must be taken on the replacement or funds from other sources must be found.
6. What is the most frequent cause for 1031 Exchanges to fail?
Failure to locate suitable replacement property is the biggest cause for failure. Most sellers are able to identify replacement property within 45 days, but frequently, the 180 day replacement period expires before a closing can be arranged. Failure to arrange financing, zoning, soil problems, title defects and other problems are among other causes for failed Like Kind Exchanges.
7. What happens if a replacement is not purchased?
The transaction is taxed as a sale.
8. How much gain is taxed if only part of the proceeds is reinvested?
Whatever is not reinvested is taxed.
9. Are there any restrictions on the type of real estate that qualifies for replacement?
Any real estate anywhere in the USA qualifies. Fractional interests qualify, multiple properties are eligible, but foreign property is not allowed.
10. What options are available if the property being sold is owned by a corporation, partnership, or LLC?
The entity that sells property must also be the entity that purchases property. However, it is NOT possible to exchange partnership/LLC units or shares of corporate stock.
The IRS prohibits the property owner from taking possession of the proceeds from the sale of property during a 1031 Like-Kind Exchange. A Qualified Intermediary, such as Curchin 1031 Exchange LLC, acts as a fiduciary to hold the sales proceeds during the exchange period and provides guidance to help the property owners comply with rather complex IRS rules.
The QI cannot be any person that the property owner has had a business relationship with in the prior two years. This includes your real estate agent, attorney, accountant, or investment advisor. Since Curchin has not had a previous business relationship within the past two years, it allows us to serve as your QI.
While there are many financial and tax benefits of a Section 1031 Like-Kind Exchange, the property owner must not overlook or omit any steps in the process. IRS Code Section 1031 and the Regulations contain many rules with strict and non-extendible deadlines. You can trust Curchin 1031 Exchange, LLC to navigate your transaction.We are available at our Red Bank, NJ office to meet personally with property owners considering 1031 exchanges. We are also available by phone or email.
On request, we can mail, fax or email our package of documents which includes a plain English explanation of the procedure and our role in the transaction.