THE PROBLEM: On a Section 1031 Tax Deferred Exchange, the taxpayer has 45 days from the closing of the sale of the relinquished property, to identify possible replacement properties. Should the taxpayer close on the sale of their relinquished property on or after November 18th and the taxpayer does not identify replacement property by the end of the identification period (the 45th day), the Taxpayer’s Section 1031 exchange will have failed.  The taxpayer will then have the option of paying the taxes due in the year of the sale of the relinquished property or in the year the Section 1031 transaction failed.


AN EXAMPLE Taxpayer closes on the sale of their relinquished property on November 19, 2018.   The last day for the taxpayer to identify (the 45th day) ends on January 2, 2019.

Although the taxpayer had a “bona fide intent” to enter into the tax-deferred exchange at the beginning of the exchange period, the taxpayer failed to timely identify any possible replacement properties.  The taxpayer will have a choice of which tax year to pay the taxes due on this property, either tax year 2018 or tax year 2019.  IRS Reg. Section 1.1031(k)-1(j)(2).

This same rule should apply if the taxpayer had closed on the sale of their relinquished property prior to November 18; properly identified within its 45 day identification period and failed to close on their replacement property within its 180 day period for closing which expired in the next tax year.  The taxpayer would then have the same option of choosing which year to pay the tax that is due—the year the 1031 process began or the year the 1031 transaction failed.

At Liberty 1031, we always recommend that the taxpayer consult with their tax and/or legal counsel on all matters dealing with the Internal Revenue Serice.

For more information on Section 1031 issues go to our website: and visit the FAQ section.  Or call us today at 866.903.1031.

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