The IRS has granted tax relief to California residents in the form of an extended tax deadline. In addition to giving you more time to file your taxes, this decision can also have interesting ramifications for 1031 exchanges. Keep reading to learn why.
What Is a 1031 Exchange?
1031 exchanges get their name from section 1031 of the Internal Revenue Code (IRC), which you can read here.
A 1031 exchange is a tool that allows investors to exchange a real estate investment property for another, deferring capital gains taxes in the process. .This is important because under normal circumstances, you are required to pay these taxes at the time of the sale.
By avoiding immediate taxation, investors have more funds available to acquire a higher-quality asset, leveraging equity to increase cash flow and earn greater returns on their investment.
One of the keys to taking advantage of 1031 exchanges is to understand that this type of exchange must be carefully planned and executed due to the limits and timeframes imposed on it by the IRS.
The 45-Day Rule and the 180-Day Rule
More specifically, there are two time-sensitive rules you need to observe in a 1031 exchange:
- 45-day rule. You have 45 days from the date you sell the property you want to exchange to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary you are required to have to hold the cash after you sell the original property.
- 180-day rule. This rule is simple: you must close on the replacement property within 180 days of the sale of the original property. Note that both the 45- and the 180-day periods run concurrently.
California IRS Disaster Extensions and 1031 Exchanges
If you live in California, you probably already know that the IRS has offered tax relief to taxpayers affected by the storms that hit California at the beginning of 2023.
Taxpayers who reside or have a business in localities designated as disaster areas have until October 16, 2023 (instead of April 18, 2023) to file various individual and business tax returns and make tax payments. To check the list of affected localities, visit the Tax Relief in Disaster Situations on the IRS website.
This means that if you reside or have your principal place of business in one of those areas, you may qualify as an affected taxpayer, which would extend your 1031 Exchange deadlines until October 16, 2023. (Be sure to check with a tax professional to ensure you qualify to be considered an affected taxpayer.)
Have Questions About 1031 Exchanges? Contact Chantel Aguilar Today
Let’s say, for example, that you were to close the sale of the property you intend to exchange on April 1, 2023. Under normal circumstances, you would have until May 16, 2023 (45 days from April 1, 2023) to identify potential replacement properties and until September 28, 2033 (180 days) to close on the replacement property.
With the disaster extension, however, those deadlines would be pushed to October 16, 2023, giving you more time to identify properties and make an informed decision that works in your favor.
Disclaimer: This material is for general information and educational purposes only. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
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