The requirements imposed by IRC Section 1031(a)(3) are familiar to many real estate and tax professionals. They were implemented as part of the Tax Reform Act of 1984 and provide limitations on the amount of time taxpayers have to formally identify and acquire replacement property. Both limits are easy to remember and compute. Generally, taxpayers have 45 days to identify replacement property and 180 days to acquire it. The day following the sale of the relinquished property is day one. All calendar days are counted, and the 45- and 180-day limits may not be extended, even if they fall on a Saturday, Sunday or legal holiday.
However, the Code includes an additional caveat to the general 180-day rule that becomes critical to calendar year taxpayers beginning on October 17th of each year. An exchange must be completed by the earlier of 180 calendar days after the date the relinquished property is transferred, or the due date of the taxpayer's tax return for the taxable year (determined with regard to extension) during which the exchange commenced.
Consider the following example:
Robert is a calendar year taxpayer who sells his investment property on December 1, 2009. He engages a Qualified Intermediary to facilitate his exchange and identifies one replacement property by January 15, 2010. In mid-March, Robert signs a contract to acquire that replacement property, later closing the purchase on May 1st.
Meanwhile, Robert files his 2009 income tax return on April 15, 2010. He does not apply for an extension. Because Robert did not acquire his replacement property before filing his return, and since he did not request a filing extension, his exchange period ended on April 15, 2010.
Could Robert argue that his exchange period did not end when he filed because an extension was available to him?
In Christensen v. Commissioner, KTC 1998-106th (9th Cir. 1998), Taxpayers sold relinquished property near the end of the calendar year and did not acquire replacement property prior to the due date of their income tax return. In addition, they did not request or receive an extension of time to file their return. Taxpayers claimed the time limits under Section 1031(a) were misinterpreted and that the "due date (determined with regard to extension)" should include an extension that is available even if the Taxpayers did not apply for and receive the extension.
The tax court held that the language of Section 1031(a) is unambiguous: the deadline to complete the exchange was the due date of Taxpayers' return, including any granted extensions, but not including extensions that were merely available or possible. Because Taxpayers failed to complete the exchange by the due date of their tax return, the transfer was not a good like-kind exchange.
So in our example, Robert is out of luck. He missed the opportunity to defer taxable gains under a like-kind exchange because he failed to file for an extension of the due date for his income tax return.
For transfers occurring between October 17, 2009 and December 31, 2009, the end of the exchange period will fall on April 15, 2010. Remember the Christensen's plight and if you have not acquired replacement property prior to April 15, 2010, request a filing extension in order to retain the full 180 days to complete your exchange.
