1031 exchange extensions allow investors to trade investment properties while deferring capital gains or losses or capital gains tax that would otherwise be due at the time of sale. The IRS’s 1031 exchange extension rules require all exchanges to be with a qualified intermediary.
A 1031 exchange, also known as a like-kind swap, is used by some successful real estate investors to defer their taxes. Because values have grown higher than during the previous decade’s real estate bubble, 1031 exchange extensions in 2022 are an excellent time to trade assets.
The 1031 exchange allows you to exchange property in a high-priced location for one or more properties in lower-priced areas without paying federal income taxes.
Many investors view it as an effective tool for reducing their capital gains taxes and other tax obligations. As a general rule, if you sell your investment property for more than you paid, you’ll have to pay substantial capital gains tax.
In contrast to simultaneous 1031 exchanges, delayed exchanges allow 1031 exchanges to find replacement properties 45 days after selling the surrendered property. Close on a new property 180 days after selling a relinquished property.
For identifying 1031 exchange extensions, there are three rules and exceptions. Since they are mutually exclusive, it is not possible to use both at the same time.
Rule of Three
You can choose the following three replacement properties regardless of their fair market value.
A replacement property’s fair market value cannot exceed 200% (200%) of the aggregate fair market value of the relinquished property. Real estate investors can save thousands of dollars on taxes by investing in 1031 exchanges. No matter your goal, 1031 exchange extensions can assist you in achieving your goals and growing your wealth. Suppose you receive professional guidance from a 1031 exchange expert. In that case, however, you are sure to navigate the process quickly and efficiently so that you can realize the benefits of 1031 exchanges immediately.
Suppose the Exchanger discovers more prospective Replacement Properties than permitted by the Three Property Rule or the 200 Percent Rule. In that case, there will be no replacement property, so the Exchanger is treated as if there was none.
Suppose the value of the Replacement Property is worth at least 95 percent of the aggregate fair market value of all identified Replacement Properties. In that case, this rule will not apply to Replacement Property obtained before the end of the Identification Period or any correctly identified Replacement Property received before the end of the Exchange Period.
NOTICE 2020-23 – EXTENSION OF THE 1031 EXCHANGE
Due to the Coronavirus pandemic, the IRS has issued guidance extending exchange enrollment periods. The IRS Notice 2020-23 provides that taxpayers who perform time-sensitive actions listed in Revenue Procedure 2018-58 by April 1, 2020, or before July 15, 2020, are Affected, Taxpayers. The Revenue Procedure 2018-58 extends the IRC deadlines for 1031 exchanges.
This notice, 2020-23, extends the 45-day or 180-day deadline between April 1 and July 15, 2020.
|Does the extension Apply||Result|
|If your 45-day deadline is before April 1, 2020,||No||None|
|If your 45-day deadline is between April 1 and July 15, 2020||Yes||Identification deadline extended to July 15, 2020|
|If your 180-day deadline is before April 1, 2020,||No||None|
|If your 180-day deadline is between April 1 and July 15, 2020||Yes||Exchange deadline extended to July 15, 2020.|
|If your 180 deadline is after July 15, 2020,||No||None|
By avoiding significant tax penalties, 1031 exchanges allow real estate investors to grow their wealth faster by reinvesting the profits of a property sale.
Thus, it is an excellent tool for diversifying one’s portfolio. Businesses and real estate speculators benefit from the 1031 exchange because of its significant savings.
After consulting a qualified intermediary, ensure you have all the necessary components before starting your first exchange.