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Beware of potential trap for year-end like-kind exchanges

Mar 09, 2020

A common tax planning tool for real estate transactions is for a taxpayer to engage in a like-kind exchange under Sec. 1031. Here’s what a like-kind exchange looks like, if properly structured for the exchange rules:

  • A taxpayer sells property (relinquished property) and reinvests the proceeds into new property (replacement property), avoiding current taxation of any gain realized on that sale.
  • Tax is deferred by reducing the taxpayer’s basis in the replacement property by the amount of the deferred gain.
  • This results in lower tax depreciation in future years (if the replacement property is depreciable) and a higher taxable gain on the ultimate sale of the replacement property.

One of the requirements for structuring a like-kind exchange properly is the timeline. The taxpayer has to acquire the replacement property within 180 days of the sale of the relinquished property. For sales that occurred in the fourth quarter of 2019, this can trip up the unwary—and result in the transaction becoming fully taxable.  

What to watch for:

While the statute generally provides for a 180-day replacement period, the period technically ends on the date of the earliest event: 180 days from the sale of the relinquished property or the due date (including extensions) for the taxpayer’s return for the tax year in which the relinquished property was sold.  

Taxpayers who relinquish property in the final months of 2019 must observe the dates carefully. If replacement property has not been acquired by the original due date of the taxpayer’s return (3/15 for partnerships and S corporations or 4/15 for individuals), the taxpayer should file for an extension for their tax return, even if they are otherwise able to file their return timely. 

Failure to file for an extension would shorten their 180-day replacement period and blow their like-kind exchange.

How Wipfli can help

Wipfli serves nearly 7,500 construction, specialty contractor, and real estate owners, developers, and property management organizations. Our team brings the specialized knowledge you need to your taxes. See our web page to learn more about our construction and real estate services or check out a list of articles related to taxes.

Author(s)

Crystal Christenson, CPA, MST
Partner
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