Is it too late?

[Bruce Desk]

I sold my second home in 2022 and immediately bought another but at settlement didn't do the 1031 exchange paperwork.  All proceeds from the sale went into the purchase.  Is it too late for the settlement company to correct the paperwork?  This was a vacation property, not a rental.

[Steve K.]

The timeframe for completing a 1031 is 45 days to identify replacement property, 180 days to close, but you have to start the process of working with a qualified intermediary prior to selling the property, because the funds must be help in escrow by the QI, so in your case I believe it is too late at this point in time unfortunately, because you have probably already dispersed the proceeds from closing into a personal account. 

A reverse 1031 is when you buy the replacement property first and then sell. I believe there are additional fees for doing it this way, due to having to transfer the property into a trust.  

However the timeframe may be irrelevant in this case anyway because you mentioned this was a vacation home not a rental. Typically, 2nd homes are considered for personal use and do not qualify for a 1031 exchange. You would have needed to rent out the property for awhile (I believe 6 months-1yr.) and use it less than 14 days/yr. before selling it, and would also need to rent the new property out during the first two 12-month periods after the exchange, for more than 14 days per year, and use it yourself for fewer than 14 days per year/ no more than 10% of the nights rented for it to qualify. 

@Dave Foster is our resident 1031 expert and can correct me if I'm wrong on any of this. 

[Dave Foster]

@Steve K., thanks for those kind words.  You are spot on.  @Bruce Desk, I'm afraid the ship has sailed on both accounts that Steve said.

1. It wasn't treated as in investment property.  Now some personal use of an investment property is perfectly fine.  But if you never rented it and never treated as an investment also you cannot 1031 it.  Steve is referring to the safe harbor of Rev Proc 2008-16 which is a safe harbor for the IRS guaranteeing your investment intent.  There is another exception - days you stay in it don't count if you are working on the property.  So a lot of our clients will take a can of paint with them (or a hammer for an electrical problem).  So they can exempt some of the days they stay.

But more importantly.

2. You must use the services of a 3rd party called the Qualified Intermediary (someone like us).  We are required by the IRS to document the exchange and hold the proceeds between sale and purchase.  And we must be in place prior to the closing of the sale.  If you touch the money.  Or if a QI documentation is not on the settlement of the sale then you cannot do a 1031 exchange.  

[Bruce Desk]

Thanks guys.  I'm very disappointed my realtor or settlement agents didn't notify me of this.  5 years ago I just bought a small place to vacation at and last year decided to sell it and buy a better place preparing for full time retirement.  Now I'm stuck with a massive tax bill and no money to pay it.  There goes my retirement plan.

[Alex Olson]

@Bruce Desk How much money will you have left after you pay taxes? I don't think all will be lost if you reinvest appropriately. 

[Bruce Desk]

Thanks Alex, all proceeds from the sale of the former vacation property were rolled into the new one (no hold-back).  Now I'm stuck with a $30k CG bill.  Looking for any/all ways to increase the cost basis.  Would like to find a list of expenses the IRS will/will not accept as valid expenses towards that end.