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1031 Tax Deferred Exchanges


Dear Phyllis,

After my tenant gave me notice I was thinking of selling my La Crescenta duplex.  I received a letter from a local Realtor® looking for a property similar to mine for a client.  I contacted him and one thing led to another and I sold it to his client.  Because of tax ramifications, I need to buy a replacement property within six months from this sale. I just learned that the next property needs to be more expensive than the one I sold. At this point I am feeling very panicked and not clear on what to do next.     Stressed Out


Dear Stressed Out,

As a real estate agent, I cannot offer tax advice. You could have serious tax implications and need to discuss this with your CPA. I am assuming you used the services of an Exchange Accommodator. The Accommodator prepares all the necessary paperwork, holds the exchange funds and guides you through the process.

As a Realtor®, this is my understanding. A 1031 exchange allows the owner of an investment property to sell and reinvest the proceeds in another investment property of equal or greater value without having to pay capital gains tax.  A 1031 defers payment on the gain until the next time you sell.  Then, you can do another 1031 or pay the combined capital gains tax that you owe from any profit you have made on both properties.

You are correct that you have six months to close on the Replacement Property.  However, you are only allowed forty-five days from the close of the sale to identify your Replacement Property. It can be extremely difficult to find a suitable replacement within this timeline.  The only opportunity for an extension would be due to a federally declared disaster.

Sometimes in similar circumstances your Purchase Contract might have stated that your sale is subject to you finding a Replacement Property. In this instance you would have had more than forty-five days to find a replacement. In addition to a CPA you may also consider meeting with a real estate attorney.  Best of luck to you.