Tax Code Doesn't Allow for Extension on 45 Day Period for 1031 Exchange
Byline: Tom Resnick
Q. A little over a month ago, I sold my three flat with the intention of doing a 1031 exchange for a larger building. The sales proceeds were deposited in escrow with the title company. A few days after the sale, my father had a medical emergency that required me to fly to Florida. I have just returned and I only have a couple of days left on my 45 day period to identify a replacement property. How do I go about requesting an extension of the 45 day period?
A. You don't. There is no provision in the tax code that provides for an extension of the 45 day period to identify the replacement property.
For those not aware of this tax deferment tool, Section 1031 of the Internal Revenue Code allows the seller of investment property to sell his or her property and, so long as the provisions of Section 1031 are complied with, use the sales proceeds to purchase "replacement" property without paying capital gains tax on the sale. These are called "1031" or "Starker" exchanges. The following may help illustrate the process.
Seller purchases an apartment building in 1995 for $200,000. In 2002, he sells the property for $250,000. Without using the benefits of an exchange, seller would pay capital gains tax on the difference between the basis in the property (original purchase price less depreciation taken on the property) and the sales price (less expenses related to the sale and capital improvements). If seller elects to "exchange" the property, the net sale proceeds from the sale are deposited into an account outside the control of the seller, usually either with the title company or a bank. Seller then has 45 days from the date of the sale to identify a replacement property and 180 days from the date of the sale to close on the purchase of the property identified.
Presuming the provisions of Section 1031 are complied with, the tax on the gain from the sale is deferred until the replacement property is either sold or exchanged. Other circumstances could result in ultimately no tax ever being paid on the transaction. …