Suppose you’re one of the many wise investors looking to commence or have already engaged in a 1031 exchange. If that’s the case, you’ve already made the first step toward reinvesting some serious cash from your investment property sale.
Whether it’s to upgrade a property, spread risk by diversifying their real estate portfolio, or move on from a problematic property, many investors are becoming hip to the benefits of 1031 exchanges. This powerful tool outlined in section 1031 of the Internal Revenue Code allows investors like you to take the proceeds from an investment property sale and reinvest them into a new “like-kind” property while deferring their capital gains taxes from the sale.
But you already knew that, didn’t you? You also probably know how stringent the requirements and deadlines are for a successful 1031 exchange, and if you’re reading this, you are likely wondering if you can get an extension on a 1031 exchange.
Luckily, the IRS has extended deadlines for some residents of California. In this article, I’ll break down the 1031 exchange windows and lay out the eligibility for those who may qualify for an extension on their 1031 exchange.
1031 Exchange Windows Explained
1031 exchanges bring a swath of benefits to investors. They also have strict timelines and deadlines that must be followed throughout the process.
The two main restrictions are the identification period and the exchange period.
- Identification Period: The identification period is the timeframe during which investors must identify the replacement property(s) for the exchange. This is called the 45-day rule, as the investor must identify the replacement property(s) within 45 calendar days from the sale date of the relinquished property. There are a few guidelines within this requirement.
- The investor can identify any number of replacement properties as long as their aggregated fair market value does not exceed 200% of the fair market value of the relinquished property.
- The investor can identify up to three potential replacement properties of any value as potential replacements for the relinquished property.
- These identifications must be made in writing and delivered to a qualified intermediary or designated party.
- Exchange Period: The exchange period is a timeframe in which the investor is required to complete the 1031 exchange process. This is often referred to as the 180-day rule, as the investor has 180 calendar days from the day the relinquished property is sold. There are also a few guidelines that must be followed during this period.
It is crucial to understand that under normal circumstances, these timelines are rigid and inflexible, meaning that investors are required to adhere to them. Failing to do so will result in a nullified 1031 exchange and the investor will be responsible for paying capital gains taxes on the property sale.
However, there are certain circumstances where investors can extend 1031 exchange timelines and windows.
Is There Any Way to Get an Extension on a 1031 Exchange?
I know what you’re probably thinking: “You said 1031 exchanges have a strict window and uncompromising guidelines, but now you say there’s a way to get an extension on a 1031 exchange?”
The truth is that while the general rule is that NO, you cannot extend a 1031 exchange, sometimes there are specific circumstances in which the IRS will provide extensions. One such circumstance is the winter storms that affected many counties in California during 2023.
As a result of winter storms, mudslides, and flooding that occurred from Jan. 8, 2023 to Jan. 10. 2023, the IRS issued an initial extension of the 45- and 180-day deadlines for 1031 exchanges in affected counties. On Feb. 24, 2023, the IRS extended these deadlines to Oct. 16, 2023, allowing investors more time to identify replacement properties and complete their 1031 exchange.
Who is Eligible?
The extensions on 1031 exchanges apply to investors that reside in the following counties:
Alameda, Alpine, Amador, Butte, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, Yolo, and Yuba.
This eligibility applies to investors who qualify as an “affect taxpayer,” which means they fit one of the following:
- Their principal residence is located in one of the aforementioned disaster areas
- Their business or sole proprietorship has its principal place of business located in one of the aforementioned disaster areas
- They are a relief worker assisting in one of the aforementioned the disaster areas
- Their records are held within a location in one of the aforementioned disaster areas
The eligibility also applies to those “having difficulty” meeting deadlines. To qualify, they must prove one of the following reasons:
- The original property or replacement property(s) is located within one of the disaster areas
- The principal place of business of any party of the transaction is located in one of the disaster areas
- One of the reasons listed in Revenue Procedure 2018-58
In addition, these extensions are available to investors who began their 1031 exchange transaction(s) between the dates of Nov. 24, 2022, and Jan. 8, 2023 to extend their 45-day identification period to Oct. 16, 2023 or 120 days from the original 45-day deadline, whichever is later.
They also extend the 180-day deadline for those who initiated their 1031 exchange between the dates of July 12, 2022 and Jan. 8, 2023 to Oct. 16, 2023 or 120 days after the initial 180-day deadline, whichever is later.
What are the Extended Deadlines?
The extended deadlines are as follows:
45-day Deadline: Oct. 16, 2023 or 120 days after the initial deadline for investors who began their 1031 exchange between Nov. 24, 2022 and Jan. 8, 2023, whichever is later.
180-day Deadline: Oct. 16 or 120 days from after the initial deadline for investors who began their 1031 exchange between July 12, 2022 and Jan. 8, 2023.
As stated earlier, the IRS is ordinarily unwavering in its requirements for 1031 exchanges. However, these deadline extensions offer investors an unprecedented opportunity because they allow qualified investors more time to prepare and complete their 1031 exchange.
Those looking to initiate a 1031 exchange or are in the process of one should still consult with a qualified tax or 1031 exchange professional to ensure that their 1031 exchange process fulfills all the requirements and take advantage of any exceptions, such as an extension on a 1031 exchange.
Please consult your tax advisor and 1031 Exchange accommodator to confirm the timelines/deadlines for your particular situation. Every exchange is different and has its own nuances and you need to check with your team to be sure what rules apply to your situation.
Make Your 1031 Exchange as Easy as Pie with Canyon View Capital
At Canyon View Capital, we have a thorough understanding of the ins and outs of 1031 exchanges. That’s because our professionals have managed multifamily real estate for over 40 years. We’re passionate about real estate and enjoy sharing our knowledge with investors.
We understand that 1031 exchanges can be a rigid and time-consuming process. That’s why we want to help investors like you enjoy the tax deferral benefits of 1031 exchanges without the headaches. Whether you’re looking for an extension on a 1031 exchange or simply starting a new one, CVC has your back and is ready to answer any of your questions.
Still Hazy on Extensions on a 1031 Exchange?
Canyon View Capital can show you the way! We will walk you through your 1031 exchange investment, and our experts will always answer your questions honestly, completely, and promptly. CVC will help you cut through the red tape, no matter how sticky it gets. For more information, contact Canyon View Capital.
Gary Rauscher, President
When Gary joined CVC in 2007, he brought more than a decade of in-depth accounting and tax experience, first as a CPA, and later as the CFO for a venture capital fund. As President, Gary manages all property refinances, acquisitions, and dispositions. He works directly with banks, brokers, attorneys, and lenders to ensure a successful close for each CVC property. His knowledge of our funds’ complexity makes him a respected executive sounding board and an invaluable financial advisor.