Extending the Time Period of a 1031 Like-Kind Exchange

Extending the Time Period of a 1031 Like-Kind Exchange

A 1031 exchange serves as a valuable tool for investors aiming to defer capital gains taxes by selling an investment property and reinvesting the proceeds in another property. Due to the tax benefits it offers, the regulations surrounding 1031 exchanges are stringent. One notable aspect is the imposition of strict timelines by the IRS for completing these transactions.

To adhere to the guidelines, potential replacement properties must be identified within 45 days following the sale of the asset to be replaced, commonly known as the relinquished property. Furthermore, the acquisition of the replacement property must be finalized within 180 days of the sale, inclusive of the initial 45-day identification period.

Alongside these timelines, taxpayers are also required to fulfill additional stipulations set by the IRS to successfully complete a 1031 exchange.

Apart from the time constraints, there are additional requirements imposed by the IRS that taxpayers must meet for a successful completion of a 1031 exchange:

High stack of office documents symbolizing the requirements and paperwork for completing a 1031 like kind exchange emphasizing the tax benefits and regulations of such property investment strategies

Firstly, investors must refrain from accessing the proceeds generated from the sale of the relinquished property during the acquisition period. To ensure compliance with this "arms-length" status, it is necessary for investors to engage a Qualified Intermediary (QI) to facilitate the exchange. The QI assumes the following responsibilities:

  1. Holding the funds in a separate account that is not accessible to the investor.
  2. Receiving the formal identification of potential replacement properties as per IRS regulations.
  3. Overseeing the purchase of the identified replacement property.
  4. Maintaining comprehensive documentation of all transactions involved in the exchange process.

Another important requirement for a successful 1031 exchange is that the value of the replacement property must be equal to or greater than the value of the relinquished property. Additionally, the investor needs to identify potential replacement properties that fall into one of the following categories:

  1. The investor can identify up to three potential acquisitions without any limitation on the total value.
  2. The investor can identify more than three potential replacement properties, but the combined market value cannot exceed 200 percent of the original sale.
  3. The investor can identify any number of properties with any individual or combined value, but must subsequently acquire at least 95 percent of the identified value.

Lastly, in order to fully qualify for the 1031 exchange, the investor must not only replace the value of the relinquished property but also the debt associated with it. If the purchase price of the replacement property is lower than the sales price of the relinquished asset, the remaining amount, known as "boot," will be subject to taxation.

How to get an Extension for your Timeline

Gantt chart illustration for managing timeline extensions in a 1031 like kind exchange underscoring the strategic planning needed to maximize tax benefits in property investments

Obtaining an extension on the timeline for a 1031 exchange is generally not possible. The 180-day period allotted for completing the exchange is typically firm and cannot be extended. However, it is important to note that during the Covid-19 pandemic, the IRS did provide extended deadlines to accommodate the restrictions imposed by the crisis.

In certain circumstances, the IRS may grant an extension if the target property is located in an officially declared disaster zone. This extension allows taxpayers extra time to assess the suitability of the identified replacement property. The IRS follows the guidelines outlined in Revenue Procedure 2018-58 to determine eligibility for a disaster-related extension.

It is worth mentioning that a taxpayer may need to request an extension for filing their taxes if the exchange period overlaps with the regular tax filing deadline. For instance, if the exchange period concludes after the standard filing deadline, and the taxpayer has not successfully acquired the replacement property in time to meet the filing deadline, they can submit Form 4868 to request an extension for filing taxes.

Form 4868, also known as the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, allows taxpayers to request an additional period of time, usually six months, to file their tax returns. This extension applies to the tax filing requirement and does not impact the 1031 exchange itself.

It is important to note that while requesting a tax filing extension may grant additional time for filing taxes, it does not extend the 180-day deadline for completing the 1031 exchange. Taxpayers must still abide by the original timeline for identifying and acquiring the replacement property to fully qualify for the tax benefits associated with a 1031 exchange.

In any case, it is advisable to consult with a tax professional or Qualified Intermediary to ensure compliance with all IRS regulations and to explore any available options for extensions or accommodations that may apply to your specific situation.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Common Disqualifications for Properties in a 1031 Exchange

Non-negotiable Factors in a 1031 Exchange

A 1031 exchange comes with several in-stone requirements that must be met. Here are some key factors:

  1. Equal or Greater Value: The relinquished property must be exchanged for replacement property/properties of equal or greater value.
  1. Calendar Deadlines: Strict deadlines must be followed during the exchange process. These include identifying replacement properties within 45 days and completing the exchange within 180 days.
  1. Involvement of a Qualified Intermediary (QI): All funds and proceeds must be handled by a Qualified Intermediary, who acts as a neutral third party during the exchange.
  1. Property Eligibility: Not all properties qualify for a 1031 exchange. Eligible properties must meet certain criteria to be eligible for tax deferral benefits.

By understanding and adhering to these non-negotiable requirements, investors can navigate the 1031 exchange process successfully and maximize their tax benefits.

The Evolving Landscape of 1031 Exchanges

In the not-so-distant past, various types of personal or intangible properties, such as machinery, equipment, and collectibles, were eligible for 1031 exchanges. Even patents and copyrights could be exchanged.

However, with the implementation of the Tax Cuts and Jobs Act in 2017, many of these assets were disqualified from like-kind exchanges. Today, only "real property held for productive use or investment" qualifies for a 1031 exchange.

But it doesn't end there. Not all real estate falls under the umbrella of qualified like-kind exchange properties. The IRS specifies certain types of real estate that are ineligible for such treatment.

Navigating the Limitations: Real Estate Bought and Held Primarily for Sale

Are you considering venturing into the world of buying and flipping houses? That's an exciting endeavor. However, it's important to note that such properties cannot be included in a 1031 exchange. The IRS categorizes this type of real estate as "stock in trade" or "held primarily for sale."

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To determine if a property is held primarily for sale rather than for investment, certain parameters come into play:

  1. The original purpose and intent of purchasing the property.
  2. The extent of improvements made to the property.
  3. The frequency and continuity of sales made.
  4. Your primary occupation or business.
  5. Use of advertising, promotion, or other efforts to find buyers.
  6. Listing the property with brokers.
  7. Duration of the property's hold.

In essence, if your intention was to acquire a property, make improvements, and quickly sell it to another buyer, it does not qualify for a like-kind exchange. Additionally, selling an investment property within 12 months of acquisition can raise concerns with the IRS.

Exploring the Limits: Primary Residence

Wondering if you can include your primary residence—the place you call home most of the time—in a 1031 exchange? The answer is a firm "no." Although your home may appreciate in value, it doesn't fall under the category of real estate held for trade or investment.

There is a potential scenario where your home could qualify for 1031 exchange treatment: if you choose to convert it into a rental property instead of residing in it. However, even in this case, there are strict rules to follow. First, you cannot continue living in the property while renting it out. Second, you must plan to hold the house as a rental property for a minimum of two years to meet the qualifying criteria.

Beyond Borders: Foreign Real Estate

When it comes to a 1031 exchange, you have the flexibility to replace a property within the United States with another property located anywhere else in the country. This includes properties in the U.S. Virgin Islands and Guam, but excludes properties in Puerto Rico.

However, it's important to note that you cannot exchange U.S. property for properties in countries like Canada, Mexico, or any other foreign location outside the United States.

On the other hand, it is possible to exchange foreign real estate held for trade or investment for real property in any country other than the United States. It's crucial to familiarize yourself with the specific rules and regulations of each country regarding purchases, sales, and exchanges.

Before proceeding with an exchange, make sure to understand the deadlines and requirements set by the IRS. Additionally, ensure that both the property you wish to exchange and the property you intend to acquire meet the IRS qualification criteria. Failing to do so can result in unintended consequences during the exchange process.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Using a 1031 Exchange for Constructing an Investment Property: Is it Possible?

Investors in the real estate industry can utilize 1031 exchanges to defer the payment of capital gains taxes when they sell an investment property and use the proceeds to reinvest in another property. It is important to note that if you choose to complete a sale and purchase outside of a 1031 exchange, you will be liable to pay capital gains taxes on the difference between the adjusted basis and the sale price of the property.

Suppose you purchased a piece of land for $250,000, which included the acquisition costs, and spent $100,000 on improvements, making your adjusted basis $350,000. After holding the property for five years, you decide to sell it for $600,000. This means that you will owe capital gains taxes on the difference between the sale price and the adjusted basis, which is $250,000. Depending on your tax bracket, you could owe up to $50,000 in taxes.

If you sell an investment property and choose to conduct a 1031 exchange, you can reinvest the proceeds from the sale into a new property while adhering to the procedures and timelines that the IRS created for the transaction. By doing so, you can reinvest the entire amount of the sale, which in the example provided was $600,000, rather than just $550,000. However, there are several essential requirements you must follow to qualify for this tax-deferred exchange:

●     Firstly, you must use a Qualified Intermediary to manage the process. The QI creates an account to hold and manage the proceeds between the initial sale and the final acquisition.

●     Secondly, you must identify potential replacement properties within 45 days of the sale and complete the purchases, or purchases, within 180 days from the start. This means that you have 45 days to provide a written list of potential replacement properties to the QI and 180 days to complete the purchase(s) of the replacement property(ies).

●     Lastly, it's important to note that the value and debt levels of the replacement property must match or exceed that of the relinquished property. In other words, the replacement property must have a purchase price equal to or greater than the relinquished asset, and you must also swap an equal or greater amount of debt.

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Completing a 1031 exchange can be a complex transaction with strict timelines to adhere to, but the potential tax deferral can offer significant advantages. One of the benefits is the ability to use the exchange for subsequent investments, leading to a transfer when you pass away. At this point, the heir will inherit the property at its stepped-up value, eliminating any deferred taxes. This feature has the potential to create an excellent opportunity for investors to continue growing their investment portfolios while mitigating their tax liability.

Can I Build on the Property?

If you're considering building on a replacement property acquired through a 1031 exchange, there are specific guidelines you need to follow. If the replacement property's value equals that of the relinquished property, you can proceed with the exchange and make any desired improvements to the replacement property. However, if the replacement property's value is lower than that of the relinquished property, you'll need to make improvements to bring its value up to par.

The catch is that all the necessary improvements must be completed within the 180-day period allowed for the exchange. Additionally, you'll need to outline the planned improvements within the first 45 days after identifying the replacement property to be eligible for the exchange. It's essential to work with a qualified intermediary and seek professional advice to ensure you comply with all the rules and regulations of a 1031 exchange.

Can I Transact a 1031 Exchange into New Construction?

The 1031 exchange allows real estate investors to defer paying capital gains taxes by reinvesting proceeds from the sale of an investment property into a replacement property. However, one of the key requirements is that the value of the replacement property must be equal to or greater than the value of the relinquished asset. This requirement can make it challenging to use a 1031 exchange to build on a replacement property.

For instance, if an investor is selling a retail property and wishes to build a multifamily housing structure on vacant land, they must ensure that the value of the new asset is equal to or greater than the original property. If the new acquisition is of lower value until construction is completed, the investor must complete the construction by the end of the 180-day period. During this time, the title must be held by a qualified intermediary.

It is important to follow the rules and timelines of a 1031 exchange to avoid disqualification and to ensure a successful exchange. Investors should also work with a qualified intermediary to manage the transaction and help navigate any complexities. By doing so, they can leverage the potential benefits of a 1031 exchange and potentially defer paying capital gains taxes on their real estate investments.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Why the Private Placement Memorandum is so Important

Why the Private Placement Memorandum (PPM) for Delaware Statutory Trust 1031 Exchange Investors Is So Important

All Perch Wealth Delaware Statutory Trust 1031 Exchange real estate investments must be accompanied by a unique Private Placement Memorandum (PPM) as part of its due diligence and marketing presentations. However, even more importantly, Perch Wealth insists that all potential investors thoroughly read the contents of the PPM in order to get a full picture of the potential risks associated with the DST 1031 investment, and understand how the overall investment vehicle is structured.

It is crucial for all accredited investors to carefully read the entire Private Placement Memorandum, with a particular focus on the risk section, before making any investments. IRC Sections 1031, 1033, and 721 are complex tax codes, and for this reason, it is advisable for all investors to seek guidance from a tax or legal professional to understand how these codes may apply to their individual situations.

What Is A PPM?

A private placement memorandum (PPM) is a legal document that contains a comprehensive overview of an investment offering. It typically runs over 100 pages and includes information on risk factors, financing terms, property and market details, sponsor background, and financial projections. The PPM may also include exhibits such as the DST trust agreement, subscription agreements, third-party reports, lease agreements, and due diligence information like recent property appraisals.

The PPM serves to protect both the buyer and the seller of the unregistered security by providing detailed information about the investment, including industry-specific risks, to the buyer and protecting the issuer or seller from potential liability resulting from an unhappy investor. Additionally, the PPM includes a copy of the subscription agreement, which is a legally binding contract between the issuing company and the investor.

In summary, a PPM is a confidential legal document that serves as both a disclosure agreement and a marketing tool. It should provide a detailed and informative description of the investment, without using overly persuasive language. The PPM should include information on both the external and internal risks associated with the investment, as well as potential opportunities for investors.

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Why are Disclosures Required for 1031s?

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) consider DST 1031 exchange investments as "private placements" and "non-registered securities." As a result, DST investments can only be sold to accredited investors through a FINRA-registered Broker Dealer and registered representative such as Perch Wealth. Additionally, each DST 1031 exchange investment must be accompanied by specific disclosure information for investors to read and fully understand the investment vehicle before making a decision to invest.

Risk Factors When Investing

DSTs, like all real estate investments, come with various risks, including the potential for a complete loss of principal. Risks specific to DSTs include limited management control and the requirement for investors to assume the risk of total loss. Additionally, DSTs are typically illiquid investments. Other risks associated with real estate investments in general include natural disasters, market conditions, and early termination of leases.

As DSTs are passive investments, investors have limited control over their management. Therefore, it is crucial for potential investors to thoroughly research the company and its management team before making an investment.

The private placement memorandum (PPM) should provide detailed information about the company, including its experience in managing DST 1031 exchanges, the qualifications and experience of the management team, and testimonials from past clients. Experienced firms like Perch Wealth, with a focus on the DST 1031 market and a wide range of investment options, are highly sought after by investors.

Overview & Purpose on a PPM

The "overview and purpose" section of a private placement memorandum (PPM) gives investors an understanding of the sponsor company and how they plan to use the invested funds. This section should also include information about the sponsor's market knowledge, planned operations, and due-diligence results. This information should provide investors with a clear understanding of the sponsor's identity, investment goals, and strategies for achieving them.

PPM Conclusion

A private placement memorandum (PPM) (or similar disclosure document) is a vital component of any DST 1031 investment and it is essential for investors to thoroughly review the PPM before making a decision. While reviewing PPMs can be overwhelming, the industry has standardized the format of these documents to make it easier for investors to understand and compare different investments.

Working with an experienced DST 1031 exchange representative, such as Perch Wealth, can greatly assist investors in reviewing and understanding the important information in the PPM, and can be a valuable resource in making informed investment decisions.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure: