1031 Exchange Extensions

[Sam Cannata]

A situation arose with a 1031 exchange I am in the middle of in Denver, CO. Here is the timeline. 1031 started Jan. 2nd. Identified a property and closed Feb 26th. Gave the existing tenant 29 days to vacate the property March 26th. I have contractors scheduled to start the 6th of April with the intent of bringing the value of the property to the value of the exchanged property, to not lose any taxes. The tenant refuses to move out. Can I extend the Exchange period of 180 days to give myself more breathing room, due to delaying the construction process? Thanks!

[Dave Foster]

@Guifre Mora, Thanks for the shout out!  @Sam Cannata,  Are you doing a reverse improvement exchange?  If so then your qualified intermediary took title to the new property.  For the reverse part you have 180 days from the day they took title to complete the improvements.  So that would normally buy you some time.  But in this case the rules for the straight exchange are that you have 180 days from the day you close the sale of your old property to complete the purchase of your new property.  

So if that is what happened and you actually took title to the new property then you don't have an issue with time.  You have completed the 1031 exchange.  But you have another issue - and that is that you cannot exchange into improvements on property you own.  If this is the case then the amount of those improvements will end up being taxed as boot in your exchange.  And that's very unfortunate because it should have been a big basic red flag for the QI.  Shame on them.

But if indeed you are doing a proper reverse exchange and the QI has title then there are a couple of things you can hope for and rely on.

1. You've got until June 30 to complete the improvements and take title.  So if the total amount of improvements aren't needed to fill the amount of your exchange you can always take title to the property before June 30 whenever the completed improvements equals your reinvestment requirements.  If you sold for $200K and were buying a property for $150K and putting $100K of improvements into it then you could take title when the improvements were 50% done (the cost of the property plus completed improvements equals your reinvestment target.

2. Extensions.  I think it's highly likely that there will be extensions for the 1031 timelines but I would never count on it .  Hope for it but don't count on it.  I'm just speculating here but I'm thinking that the IRS is dealing with the fires right in front of it because so much is uncharted territory for them.  So first was tax payment extensions, now tax filing extensions, And more extensions on the way.  So may real estate oriented services are shut down that it's hard to imagine there won't be extensions.  We just haven't seen it yet.