Updated November 2021
FGG is pleased to provide this timely guest blog written By Lisa Villarreal, Business Development Manager at First American Exchange Company. First American Exchange Company provides 1031 exchange Qualified Intermediary services nationwide and is a direct subsidiary of First American Title Insurance Company.
A 1031 exchange is reported on the tax return for the tax year in which the exchange begins, i.e., the tax year the relinquished property is transferred, using IRS Form 8824. The exchange period is the shorter of 180 days or the due date of the taxpayer’s tax return. If an investor's exchange transaction started late in 2021, he may need to file for an extension using Form 4868 in order to receive the full benefit of the 180-day exchange period and reflect the entire exchange on the appropriate tax return.
In a 1031 exchange, the taxpayer must acquire all replacement property by the earlier of the date that is 180 days from the date the relinquished property closes, or the date the tax return for the year in which the relinquished property closed is due, including extensions. This means that for exchanges where the relinquished property closes late in the year (in 2021, from October 17th until the end of the year), a calendar year taxpayer must get an extension of the tax filing deadline in order to benefit from the full 180 day exchange period. For example, if the relinquished property closes on December 1, 2021, and the taxpayer does not get an extension on the filing of his return, the taxpayer will only have until April 15, 2022 to acquire all replacement properties. If the taxpayer gets an extension, however, he will have until May 30, 2022 to acquire all replacement properties.
If the exchange is incomplete, the sale will need to be reported as a taxable event.
There may be some situations in which the taxpayer benefits from a shorter exchange period. For example, sometimes exchanges are started late in the year and completed the next year before April 15th (or the applicable tax filing deadline). The investor may have identified three replacement properties and acquired one, but there is still some available cash. The qualified intermediary is required to hold the remaining cash until the sooner of when all replacement properties are acquired or the end of the exchange period. In order to get his cash early, an investor can decide not to file an extension. In that case, the exchange period will end on April 15th, and the intermediary will be able to release any additional funds on the following day. If the taxpayer were to instead get an extension to the filing date of his tax return, the intermediary would be required to hold all remaining funds until the sooner of the expiration of the 180-day exchange period or the extended due date for filing the tax return.
Sometimes an investor starts an exchange but is unable to acquire any replacement property. Other times an investor may acquire some replacement property but have remaining cash which will be taxable. In both of those situations, if the investor starts the exchange in one year and receives the money in the following year, the cash boot received can be treated like an installment sale. In other words, any cash received in the second year can be reported in that year rather than the year the relinquished property closed.
If an investor completes more than one like-kind exchange during the tax filing year, he can file a summary Form 8824 and attach his own statement showing all of the information requested on Form 8824 for each exchange.
Certain rules may apply to your particular exchange transaction. For example, if you transferred your relinquished property to a related party as part of your 1031 exchange, you must file Form 8824 with your tax return for not only that year, but for the two years following the exchange. For taxpayers who are subject to filing a state tax return, you must comply with that state’s filing requirements. Also, additional filing requirements may apply to certain specialized transactions such as reverse exchanges or multi-asset exchanges.
Always check with your tax advisor to make sure you are complying with the requirements for your unique transaction.
Below are links to versions of IRS forms cited in this blog so you can further familiarize yourself with the contents. Be sure to use the latest versions of these forms when completing your 2021 tax filings.
Download Form 8824 Instructions
For more information on 1031 Exchange tax deferral strategies, please contact First Guardian Group at 866-398-1031 or info@FirstGuardianGroup.com.