Request a Filing Extension to Maximize Your Exchange Period

If you sold property in a Section 1031 tax-deferred exchange between October 18th and December 31st, 2008, and have not yet acquired identified replacement property, you'll need to extend your filing deadline or else complete your exchange by April 15, 2009 (assuming a calendar year return).

The specifics of Section 1031 require that replacement property be acquired by the earlier of:

1. the day which is 180 days after the date on which the relinquished property is transferred; or

2. the due date (determined with regard to extension) for the taxable year in which the transfer of the relinquished property occurs.

While the filing extension will never give you more than 180 days to complete your exchange, without the extension, your exchange period will be shortened to your tax return due date.

In a 1998 tax court case, the taxpayers did not acquire replacement property before the due date of their return, which was earlier than 180 days after they transferred their relinquished property. Nor did the taxpayers request or receive a filing extension (see: Christensen v. Commissioner, KTC 1998-106 (9th Cir. 1998)).

The taxpayers argued that the tax court misinterpreted the time limits of section 1031(a) in that "the due date (determined with regard to extension)" should include the extension available under section 6081(a) even though the taxpayer did not apply for or receive the extension.

The tax court, however, concluded that the statute did not refer to "available" or "possible" extensions, but rather to actual extensions granted. Since the taxpayers failed to request and receive a filing extension, their exchange period ended on April 15th.

So, if you are in the middle of an exchange and you are about to file your tax return, make sure to confer with your tax advisor.