Category: 1031 Exchange General

Internal Revenue Code Section 1031
Internal Revenue Code (IRC) Section 1031, which pertains to tax deferral for like-kind exchanges of assets, has been a mainstay of the tax code since 1921.  Originally is was thought that exchanges had to be simultaneous and that the taxpayer had to give up the existing property, the “relinquished property,” and receive the new “replacement property” from the buyer of the relinquished property.  The landmark legal decision in Starker v. U.S. held that exchanges did not have to be simultaneous and Internal Revenue Service Regulations: IRC§1031 published in 1991 provided a technique whereby the taxpayer did not have to receive the replacement property from the buyer. In fact, neither the taxpayer’s buyer nor seller need to provide their cooperation in order for the taxpayer to execute an exchange.
What assets are like-kind to one another?
Determining that assets are like-kind is generally more broad when dealing with real estate than when dealing with personal property.  A regular owning of real estate is known as a fee interest.  Any type of real estate is like-kind to any other type of real estate.  So a parcel of vacant land held for investment would be like-kind to a commercial building, a condominium held for rent is like-kind to an industrial building, and so on. 
Some non-traditional asset holdings have also been found to be like-kind to a real estate fee interest such as options, timber and water rights, installment sale agreements, oil and gas rights, co-ops, improvements made upon real estate, and lessee’s interests under long term leases and easements.
Is a landowner’s income stream from a cell phone tower lease exchangeable?
A lessee’s interest in a long term lease (30 or more years) including options has been considered like-kind to real estate for a long time.  The same cannot be said about a property owner’s interest, as lessor, in a lease or long term lease. The value of an ongoing stream of income from a lease, including a cell phone tower lease, is considered rent and not a real estate interest.  However, a private letter ruling (PLR 201149003) put out by the IRS in 2011 suggested a way to effectively convert that stream of income to an interest in real estate that would become like-kind to any other fee interest in real estate. 
How may cell towers be included in a 1031 exchange?
As noted above, there is a lot of authority that easements are like-kind to real estate.  Under the PLR, if a cell tower is part of a permanent easement and the value of the easement is based upon the value of the cell tower lease, then a sale of the easement can be exchanged for other fee interests in real estate. Even if the cell phone tower is not located on an easement, the taxpayer may create the easement prior to the sale of the cell tower and effectively sell the cell tower by selling that easement. 
Easements generally can be of a limited term or a perpetual term.  The private letter ruling referred to above was based upon a perpetual term easement.  Easements can be used for various purposes, such as granting access to property or granting possessory rights in property.  It is possible that the IRS would look at the nature of a particular easement to determine whether, if it were long term, it would be like-kind to a fee interest in real estate.  It may be that a possessory-type, long-term easement would receive the same tax treatment as a permanent easement, but this was not dealt with in the PLR (See also

Internal Revenue Code Section 1031
Internal Revenue Code (IRC) Section 1031, which pertains to tax deferral for like-kind exchanges of assets, has been a mainstay of the tax code since 1921.  Originally is was thought that exchanges had to be simultaneous and that the taxpayer had to give up the existing property, the “relinquished property,” and receive the new “replacement property” from the buyer of the relinquished property.  The landmark legal decision in Starker v. U.S. held that exchanges did not have to be simultaneous and Internal Revenue Service Regulations: IRC§1031 published in 1991 provided a technique whereby the taxpayer did not have to receive the replacement property from the buyer. In fact, neither the taxpayer’s buyer nor seller need to provide their cooperation in order for the taxpayer to execute an exchange.
What assets are like-kind to one another?
Determining that assets are like-kind is generally more broad when dealing with real estate than when dealing with personal property.  A regular owning of real estate is known as a fee interest.  Any type of real estate is like-kind to any other type of real estate.  So a parcel of vacant land held for investment would be like-kind to a commercial building, a condominium held for rent is like-kind to an industrial building, and so on. 
Some non-traditional asset holdings have also been found to be like-kind to a real estate fee interest such as options, timber and water rights, installment sale agreements, oil and gas rights, co-ops, improvements made upon real estate, and lessee’s interests under long term leases and easements.
Is a landowner’s income stream from a cell phone tower lease exchangeable?
A lessee’s interest in a long term lease (30 or more years) including options has been considered like-kind to real estate for a long time.  The same cannot be said about a property owner’s interest, as lessor, in a lease or long term lease. The value of an ongoing stream of income from a lease, including a cell phone tower lease, is considered rent and not a real estate interest.  However, a private letter ruling (PLR 201149003) put out by the IRS in 2011 suggested a way to effectively convert that stream of income to an interest in real estate that would become like-kind to any other fee interest in real estate. 
How may cell towers be included in a 1031 exchange?
As noted above, there is a lot of authority that easements are like-kind to real estate.  Under the PLR, if a cell tower is part of a permanent easement and the value of the easement is based upon the value of the cell tower lease, then a sale of the easement can be exchanged for other fee interests in real estate. Even if the cell phone tower is not located on an easement, the taxpayer may create the easement prior to the sale of the cell tower and effectively sell the cell tower by selling that easement. 
Easements generally can be of a limited term or a perpetual term.  The private letter ruling referred to above was based upon a perpetual term easement.  Easements can be used for various purposes, such as granting access to property or granting possessory rights in property.  It is possible that the IRS would look at the nature of a particular easement to determine whether, if it were long term, it would be like-kind to a fee interest in real estate.  It may be that a possessory-type, long-term easement would receive the same tax treatment as a permanent easement, but this was not dealt with in the PLR (See also

Internal Revenue Code Section 1031
Internal Revenue Code (IRC) Section 1031, which pertains to tax deferral for like-kind exchanges of assets, has been a mainstay of the tax code since 1921.  Originally is was thought that exchanges had to be simultaneous and that the taxpayer had to give up the existing property, the “relinquished property,” and receive the new “replacement property” from the buyer of the relinquished property.  The landmark legal decision in Starker v. U.S. held that exchanges did not have to be simultaneous and Internal Revenue Service Regulations: IRC§1031 published in 1991 provided a technique whereby the taxpayer did not have to receive the replacement property from the buyer. In fact, neither the taxpayer’s buyer nor seller need to provide their cooperation in order for the taxpayer to execute an exchange.
What assets are like-kind to one another?
Determining that assets are like-kind is generally more broad when dealing with real estate than when dealing with personal property.  A regular owning of real estate is known as a fee interest.  Any type of real estate is like-kind to any other type of real estate.  So a parcel of vacant land held for investment would be like-kind to a commercial building, a condominium held for rent is like-kind to an industrial building, and so on. 
Some non-traditional asset holdings have also been found to be like-kind to a real estate fee interest such as options, timber and water rights, installment sale agreements, oil and gas rights, co-ops, improvements made upon real estate, and lessee’s interests under long term leases and easements.
Is a landowner’s income stream from a cell phone tower lease exchangeable?
A lessee’s interest in a long term lease (30 or more years) including options has been considered like-kind to real estate for a long time.  The same cannot be said about a property owner’s interest, as lessor, in a lease or long term lease. The value of an ongoing stream of income from a lease, including a cell phone tower lease, is considered rent and not a real estate interest.  However, a private letter ruling (PLR 201149003) put out by the IRS in 2011 suggested a way to effectively convert that stream of income to an interest in real estate that would become like-kind to any other fee interest in real estate. 
How may cell towers be included in a 1031 exchange?
As noted above, there is a lot of authority that easements are like-kind to real estate.  Under the PLR, if a cell tower is part of a permanent easement and the value of the easement is based upon the value of the cell tower lease, then a sale of the easement can be exchanged for other fee interests in real estate. Even if the cell phone tower is not located on an easement, the taxpayer may create the easement prior to the sale of the cell tower and effectively sell the cell tower by selling that easement. 
Easements generally can be of a limited term or a perpetual term.  The private letter ruling referred to above was based upon a perpetual term easement.  Easements can be used for various purposes, such as granting access to property or granting possessory rights in property.  It is possible that the IRS would look at the nature of a particular easement to determine whether, if it were long term, it would be like-kind to a fee interest in real estate.  It may be that a possessory-type, long-term easement would receive the same tax treatment as a permanent easement, but this was not dealt with in the PLR (See also

Franchise Assets are no longer eligible for a 1031 Exchange due to the Tax Cuts and Jobs Act of 2017.
 
Can Franchise Assets be Exchanged?
People tend to equate tax deferred exchanges with real estate but exchanges can be equally advantageous when selling and buying franchises. In 1991 the tax deferred exchange regulations (Internal Revenue Service Regulations: IRC§1031) took effect, making completing an exchange easier and simpler than ever before.  These regulations allowed for the removal of the buyer of the old property and the seller of the new property as participants in a taxpayer’s exchange, with the addition of the qualified intermediary (QI).  Also, as part of these new regulations, the asset sale and asset purchase that comprised an exchange could be separated by up to 180 days.  Before that it was generally understood that the sale of an asset and the purchase of an another had to take place simultaneously.
It wasn’t long before many owners of real estate began exchanging using the safe harbor procedures set forth in the regulations.  Although personal property exchanges were covered in depth in the regulations, generally taxpayers’ use of the exchange rules to do personal property exchanges lagged behind the use for real estate transactions.  Even as personal property exchanges of machinery, equipment, vehicles, etc. gained traction, exchanges of certain intangible personal property interests such as franchise rights continued to be very underutilized.  Neither owner-operators nor their professional advisors picked up on the fact that sales and purchases of franchises could be structured to defer taxes.
Since becoming law in 1921, the rationale for the inclusion of tax deferred exchanges in the IRS code, has been that a taxpayer who is vested with an asset (such as a franchise) and who receives in exchange other like-kind assets (such as of a similar franchise or franchises in a different location), and no cash, there is a continuity of holding the same or similar assets.  Since the same kind of assets were sold and bought and the taxpayer pocketed no cash, the transaction isn’t seen as a taxable event.  The gain on the sale of the first franchise assets, the relinquished property, is deferred until the acquired like-kind franchise assets, the replacement property, are sold without a further exchange.
What Qualifies for Tax Deferral upon the Sale of a Franchise?
Perhaps the most common franchise exchanges are those that involve fast food restaurants.  An owner might have one or more franchise locations that have greatly increased in value over time, value that the owner would like to parlay into additional restaurants.  The exchange of such a business was formerly a more straightforward matter, because the IRS regarded the business as a whole entity that included the value of any underlying assets. This changed shortly before 1991’s exchange regulations, and now the IRS requires that each underlying asset be seperated and valued individually.
For franchise exchanges this means that the value of the franchise rights are separate from the value of the furniture, fixtures and equipment (FF&E). If a restaurant franchise, valued at $300,000 for the franchise rights and $200,000 for the FF&E, is exchanged for another restaurant franchise with rights valued at $200,000 and FF&E valued at $300,000, the $100,000 difference between the franchise rights sold and those bought would be taxed, even though, taken as whole entities, the two businesses are of equal value.
It’s worth noting that any value associated with goodwill, including trademarks and trade names, is not capable of being exchanged, because the regulations state that goodwill is “inherently unique and inseparable from the business.”  For this reason, sellers of businesses may wish to minimize the value of the goodwill and increase another component asset of the sale which will be capable of receiving like-kind exchange treatment.  Inventory and cash-on-hand are also not part of a franchise exchange since, unlike equipment, these assets are not held for use in a business or trade.
Retaining the Services of a Qualified Intermediary
A qualified intermediary (QI) is necessary for most exchanges in which the relinquished assets are sold to a buyer and the replacement assets are being acquired from a seller, who is not the same as the buyer of the relinquished assets. The taxpayer essentially sells the relinquished assets to the QI, who in turn sells them to the buyer. Similarly, the taxpayer purchases the replacement assets from the QI, who acquires those assets from the seller.  In effect, the taxpayer completes an exchange with the QI. 
The regulations are purposely liberal on the mechanics of transferring the relinquished and replacement assets to and from the QI.  The standard practice is for the taxpayer to “assign rights,” in the sale and purchase agreements, to the QI.  For tax purposes, this means that the QI’s right to receive the property is the same as if the QI took title from the taxpayer to the relinquished property and transferred title of the replacement property to the taxpayer.  Notwithstanding the assignment of rights to the QI, the taxpayer is permitted to make a direct transfer of the assets by bill of sale, or otherwise, of the relinquished assets to the buyer and receive the replacement assets by direct transfer from the seller. There are a few other requirements as well to meet this safe harbor.

Franchise Assets are no longer eligible for a 1031 Exchange due to the Tax Cuts and Jobs Act of 2017.
 
Can Franchise Assets be Exchanged?
People tend to equate tax deferred exchanges with real estate but exchanges can be equally advantageous when selling and buying franchises. In 1991 the tax deferred exchange regulations (Internal Revenue Service Regulations: IRC§1031) took effect, making completing an exchange easier and simpler than ever before.  These regulations allowed for the removal of the buyer of the old property and the seller of the new property as participants in a taxpayer’s exchange, with the addition of the qualified intermediary (QI).  Also, as part of these new regulations, the asset sale and asset purchase that comprised an exchange could be separated by up to 180 days.  Before that it was generally understood that the sale of an asset and the purchase of an another had to take place simultaneously.
It wasn’t long before many owners of real estate began exchanging using the safe harbor procedures set forth in the regulations.  Although personal property exchanges were covered in depth in the regulations, generally taxpayers’ use of the exchange rules to do personal property exchanges lagged behind the use for real estate transactions.  Even as personal property exchanges of machinery, equipment, vehicles, etc. gained traction, exchanges of certain intangible personal property interests such as franchise rights continued to be very underutilized.  Neither owner-operators nor their professional advisors picked up on the fact that sales and purchases of franchises could be structured to defer taxes.
Since becoming law in 1921, the rationale for the inclusion of tax deferred exchanges in the IRS code, has been that a taxpayer who is vested with an asset (such as a franchise) and who receives in exchange other like-kind assets (such as of a similar franchise or franchises in a different location), and no cash, there is a continuity of holding the same or similar assets.  Since the same kind of assets were sold and bought and the taxpayer pocketed no cash, the transaction isn’t seen as a taxable event.  The gain on the sale of the first franchise assets, the relinquished property, is deferred until the acquired like-kind franchise assets, the replacement property, are sold without a further exchange.
What Qualifies for Tax Deferral upon the Sale of a Franchise?
Perhaps the most common franchise exchanges are those that involve fast food restaurants.  An owner might have one or more franchise locations that have greatly increased in value over time, value that the owner would like to parlay into additional restaurants.  The exchange of such a business was formerly a more straightforward matter, because the IRS regarded the business as a whole entity that included the value of any underlying assets. This changed shortly before 1991’s exchange regulations, and now the IRS requires that each underlying asset be seperated and valued individually.
For franchise exchanges this means that the value of the franchise rights are separate from the value of the furniture, fixtures and equipment (FF&E). If a restaurant franchise, valued at $300,000 for the franchise rights and $200,000 for the FF&E, is exchanged for another restaurant franchise with rights valued at $200,000 and FF&E valued at $300,000, the $100,000 difference between the franchise rights sold and those bought would be taxed, even though, taken as whole entities, the two businesses are of equal value.
It’s worth noting that any value associated with goodwill, including trademarks and trade names, is not capable of being exchanged, because the regulations state that goodwill is “inherently unique and inseparable from the business.”  For this reason, sellers of businesses may wish to minimize the value of the goodwill and increase another component asset of the sale which will be capable of receiving like-kind exchange treatment.  Inventory and cash-on-hand are also not part of a franchise exchange since, unlike equipment, these assets are not held for use in a business or trade.
Retaining the Services of a Qualified Intermediary
A qualified intermediary (QI) is necessary for most exchanges in which the relinquished assets are sold to a buyer and the replacement assets are being acquired from a seller, who is not the same as the buyer of the relinquished assets. The taxpayer essentially sells the relinquished assets to the QI, who in turn sells them to the buyer. Similarly, the taxpayer purchases the replacement assets from the QI, who acquires those assets from the seller.  In effect, the taxpayer completes an exchange with the QI. 
The regulations are purposely liberal on the mechanics of transferring the relinquished and replacement assets to and from the QI.  The standard practice is for the taxpayer to “assign rights,” in the sale and purchase agreements, to the QI.  For tax purposes, this means that the QI’s right to receive the property is the same as if the QI took title from the taxpayer to the relinquished property and transferred title of the replacement property to the taxpayer.  Notwithstanding the assignment of rights to the QI, the taxpayer is permitted to make a direct transfer of the assets by bill of sale, or otherwise, of the relinquished assets to the buyer and receive the replacement assets by direct transfer from the seller. There are a few other requirements as well to meet this safe harbor.

Franchise Assets are no longer eligible for a 1031 Exchange due to the Tax Cuts and Jobs Act of 2017.
 
Can Franchise Assets be Exchanged?
People tend to equate tax deferred exchanges with real estate but exchanges can be equally advantageous when selling and buying franchises. In 1991 the tax deferred exchange regulations (Internal Revenue Service Regulations: IRC§1031) took effect, making completing an exchange easier and simpler than ever before.  These regulations allowed for the removal of the buyer of the old property and the seller of the new property as participants in a taxpayer’s exchange, with the addition of the qualified intermediary (QI).  Also, as part of these new regulations, the asset sale and asset purchase that comprised an exchange could be separated by up to 180 days.  Before that it was generally understood that the sale of an asset and the purchase of an another had to take place simultaneously.
It wasn’t long before many owners of real estate began exchanging using the safe harbor procedures set forth in the regulations.  Although personal property exchanges were covered in depth in the regulations, generally taxpayers’ use of the exchange rules to do personal property exchanges lagged behind the use for real estate transactions.  Even as personal property exchanges of machinery, equipment, vehicles, etc. gained traction, exchanges of certain intangible personal property interests such as franchise rights continued to be very underutilized.  Neither owner-operators nor their professional advisors picked up on the fact that sales and purchases of franchises could be structured to defer taxes.
Since becoming law in 1921, the rationale for the inclusion of tax deferred exchanges in the IRS code, has been that a taxpayer who is vested with an asset (such as a franchise) and who receives in exchange other like-kind assets (such as of a similar franchise or franchises in a different location), and no cash, there is a continuity of holding the same or similar assets.  Since the same kind of assets were sold and bought and the taxpayer pocketed no cash, the transaction isn’t seen as a taxable event.  The gain on the sale of the first franchise assets, the relinquished property, is deferred until the acquired like-kind franchise assets, the replacement property, are sold without a further exchange.
What Qualifies for Tax Deferral upon the Sale of a Franchise?
Perhaps the most common franchise exchanges are those that involve fast food restaurants.  An owner might have one or more franchise locations that have greatly increased in value over time, value that the owner would like to parlay into additional restaurants.  The exchange of such a business was formerly a more straightforward matter, because the IRS regarded the business as a whole entity that included the value of any underlying assets. This changed shortly before 1991’s exchange regulations, and now the IRS requires that each underlying asset be seperated and valued individually.
For franchise exchanges this means that the value of the franchise rights are separate from the value of the furniture, fixtures and equipment (FF&E). If a restaurant franchise, valued at $300,000 for the franchise rights and $200,000 for the FF&E, is exchanged for another restaurant franchise with rights valued at $200,000 and FF&E valued at $300,000, the $100,000 difference between the franchise rights sold and those bought would be taxed, even though, taken as whole entities, the two businesses are of equal value.
It’s worth noting that any value associated with goodwill, including trademarks and trade names, is not capable of being exchanged, because the regulations state that goodwill is “inherently unique and inseparable from the business.”  For this reason, sellers of businesses may wish to minimize the value of the goodwill and increase another component asset of the sale which will be capable of receiving like-kind exchange treatment.  Inventory and cash-on-hand are also not part of a franchise exchange since, unlike equipment, these assets are not held for use in a business or trade.
Retaining the Services of a Qualified Intermediary
A qualified intermediary (QI) is necessary for most exchanges in which the relinquished assets are sold to a buyer and the replacement assets are being acquired from a seller, who is not the same as the buyer of the relinquished assets. The taxpayer essentially sells the relinquished assets to the QI, who in turn sells them to the buyer. Similarly, the taxpayer purchases the replacement assets from the QI, who acquires those assets from the seller.  In effect, the taxpayer completes an exchange with the QI. 
The regulations are purposely liberal on the mechanics of transferring the relinquished and replacement assets to and from the QI.  The standard practice is for the taxpayer to “assign rights,” in the sale and purchase agreements, to the QI.  For tax purposes, this means that the QI’s right to receive the property is the same as if the QI took title from the taxpayer to the relinquished property and transferred title of the replacement property to the taxpayer.  Notwithstanding the assignment of rights to the QI, the taxpayer is permitted to make a direct transfer of the assets by bill of sale, or otherwise, of the relinquished assets to the buyer and receive the replacement assets by direct transfer from the seller. There are a few other requirements as well to meet this safe harbor.

The basics of like-kind exchanges are fairly easy to grasp. Generally speaking, most deferred 1031 exchanges are document driven processes involving a distinct set of forms, including:

Exchange agreement
Assignment agreements
Notifications of assignment
Formal identification forms

Beyond these required documents, correctly structured like-kind exchanges also demand that taxpayers adhere to a strict set of rules that include meeting stringent deadline requirements. These deadline requirements are generally absolute and no good faith exceptions exist if they are not met .1 Let’s explore the 1031 exchange deadlines, what triggers them, and whether or not extensions exist for taxpayers who might have trouble meeting them.
These deadlines are clearly defined within Internal Revenue Code section 1031 (“Section 1031”) underlying regulations which, in summary, state that in every like-kind exchange of property, the replacement property will be treated as like-kind to the relinquished property, IF the replacement property is both identified within the identification period and received by the end of the exchange period .2 These very same regulations go on to define the two stages/periods involved in every deferred exchange, known as the “identification period” and the “exchange period.”
Identification Period
The identification period, more commonly known as the “45 Day ID period,” starts on the day the relinquished property is transferred from the taxpayer to the buyer (the day the benefits and burdens of ownership transfer to the buyer) and ends at midnight on the 45th calendar day after that transfer.3 It’s critical to understand exactly when the 45 day identification period begins and ends, as it will determine the exact date by which a taxpayer must complete and deliver, in writing, the identification of their planned replacement property.
Exchange Period
The exchange period, also known as the “180 day completion period,” is generally known to begin on the day the legal ownership of the relinquished property is transferred from the seller to the buyer and end at midnight, 180 calendar days thereafter.  This general understanding is only half correct, as Section 1031’s underlying regulations describe a more nuanced end date to this deadline.
In reality, the exchange period does indeed begin on the same date as the identification period and they run concurrently. However, the exchange period ends at midnight upon the earlier of 180 calendar days after the transfer of the relinquished property or the due date of the exchanger’s tax return (with extension) as “imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.” 4
The bottom line is if you begin a 1031 exchange in the latter part of your tax year, you may not have the full 180 calendar days to complete the exchange. So, be sure to extend your tax return filing deadline to ensure that you have the opportunity to maximize the length exchange period.
Extension of the Identification and Exchange Periods
Extensions of time do exist for date driven acts within the Internal Revenue Code.5 These extensions are available for taxpayers affected by:

Federally declared disasters
Acts of terrorism
Military actions

Specifically related to deferred like-kind exchanges, Revenue Procedure 2007-56 allows extensions of both the 45-day identification and the 180-day completion deadlines. Taxpayers conducting like-kind exchanges are only allowed extensions if the Internal Revenue Service issues guidance or publishes notifications related to the three items listed above. The notice/guidance issued by the Internal Revenue Service will:

Define affected taxpayers
Detail what acts can be extended/postponed
Describe the length of the extension
Define the location of the disaster area

Summary
Whether you’re just considering a like-kind exchange or you are currently in the middle of one, it’s critical to understand the exchange deadlines. As always, be sure to consult with your tax advisor and confirm your understanding of the like-kind exchange stages, their beginning and end dates and any potential extensions of time that might be available to you.
 
1 Knight v. C.I.R., T.C. Memo. 1998-107
2 Reg. Section 1.1031(k)-1(b)(1)(ii)
3 Reg. Section 1.1031(k)-1(b)(1)(i)
4 Reg. Section 1.1031(k)-1(b)(2)(i)(ii)
Long, Jeremiah and Foster, Mary. Tax-Free Exchanges under §1031. Thompson Reuters: used as a critical source in the creation of this post.
5 I.R.C. Section 7508A

The basics of like-kind exchanges are fairly easy to grasp. Generally speaking, most deferred 1031 exchanges are document driven processes involving a distinct set of forms, including:

Exchange agreement
Assignment agreements
Notifications of assignment
Formal identification forms

Beyond these required documents, correctly structured like-kind exchanges also demand that taxpayers adhere to a strict set of rules that include meeting stringent deadline requirements. These deadline requirements are generally absolute and no good faith exceptions exist if they are not met .1 Let’s explore the 1031 exchange deadlines, what triggers them, and whether or not extensions exist for taxpayers who might have trouble meeting them.
These deadlines are clearly defined within Internal Revenue Code section 1031 (“Section 1031”) underlying regulations which, in summary, state that in every like-kind exchange of property, the replacement property will be treated as like-kind to the relinquished property, IF the replacement property is both identified within the identification period and received by the end of the exchange period .2 These very same regulations go on to define the two stages/periods involved in every deferred exchange, known as the “identification period” and the “exchange period.”
Identification Period
The identification period, more commonly known as the “45 Day ID period,” starts on the day the relinquished property is transferred from the taxpayer to the buyer (the day the benefits and burdens of ownership transfer to the buyer) and ends at midnight on the 45th calendar day after that transfer.3 It’s critical to understand exactly when the 45 day identification period begins and ends, as it will determine the exact date by which a taxpayer must complete and deliver, in writing, the identification of their planned replacement property.
Exchange Period
The exchange period, also known as the “180 day completion period,” is generally known to begin on the day the legal ownership of the relinquished property is transferred from the seller to the buyer and end at midnight, 180 calendar days thereafter.  This general understanding is only half correct, as Section 1031’s underlying regulations describe a more nuanced end date to this deadline.
In reality, the exchange period does indeed begin on the same date as the identification period and they run concurrently. However, the exchange period ends at midnight upon the earlier of 180 calendar days after the transfer of the relinquished property or the due date of the exchanger’s tax return (with extension) as “imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.” 4
The bottom line is if you begin a 1031 exchange in the latter part of your tax year, you may not have the full 180 calendar days to complete the exchange. So, be sure to extend your tax return filing deadline to ensure that you have the opportunity to maximize the length exchange period.
Extension of the Identification and Exchange Periods
Extensions of time do exist for date driven acts within the Internal Revenue Code.5 These extensions are available for taxpayers affected by:

Federally declared disasters
Acts of terrorism
Military actions

Specifically related to deferred like-kind exchanges, Revenue Procedure 2007-56 allows extensions of both the 45-day identification and the 180-day completion deadlines. Taxpayers conducting like-kind exchanges are only allowed extensions if the Internal Revenue Service issues guidance or publishes notifications related to the three items listed above. The notice/guidance issued by the Internal Revenue Service will:

Define affected taxpayers
Detail what acts can be extended/postponed
Describe the length of the extension
Define the location of the disaster area

Summary
Whether you’re just considering a like-kind exchange or you are currently in the middle of one, it’s critical to understand the exchange deadlines. As always, be sure to consult with your tax advisor and confirm your understanding of the like-kind exchange stages, their beginning and end dates and any potential extensions of time that might be available to you.
 
1 Knight v. C.I.R., T.C. Memo. 1998-107
2 Reg. Section 1.1031(k)-1(b)(1)(ii)
3 Reg. Section 1.1031(k)-1(b)(1)(i)
4 Reg. Section 1.1031(k)-1(b)(2)(i)(ii)
Long, Jeremiah and Foster, Mary. Tax-Free Exchanges under §1031. Thompson Reuters: used as a critical source in the creation of this post.
5 I.R.C. Section 7508A

The basics of like-kind exchanges are fairly easy to grasp. Generally speaking, most deferred 1031 exchanges are document driven processes involving a distinct set of forms, including:

Exchange agreement
Assignment agreements
Notifications of assignment
Formal identification forms

Beyond these required documents, correctly structured like-kind exchanges also demand that taxpayers adhere to a strict set of rules that include meeting stringent deadline requirements. These deadline requirements are generally absolute and no good faith exceptions exist if they are not met .1 Let’s explore the 1031 exchange deadlines, what triggers them, and whether or not extensions exist for taxpayers who might have trouble meeting them.
These deadlines are clearly defined within Internal Revenue Code section 1031 (“Section 1031”) underlying regulations which, in summary, state that in every like-kind exchange of property, the replacement property will be treated as like-kind to the relinquished property, IF the replacement property is both identified within the identification period and received by the end of the exchange period .2 These very same regulations go on to define the two stages/periods involved in every deferred exchange, known as the “identification period” and the “exchange period.”
Identification Period
The identification period, more commonly known as the “45 Day ID period,” starts on the day the relinquished property is transferred from the taxpayer to the buyer (the day the benefits and burdens of ownership transfer to the buyer) and ends at midnight on the 45th calendar day after that transfer.3 It’s critical to understand exactly when the 45 day identification period begins and ends, as it will determine the exact date by which a taxpayer must complete and deliver, in writing, the identification of their planned replacement property.
Exchange Period
The exchange period, also known as the “180 day completion period,” is generally known to begin on the day the legal ownership of the relinquished property is transferred from the seller to the buyer and end at midnight, 180 calendar days thereafter.  This general understanding is only half correct, as Section 1031’s underlying regulations describe a more nuanced end date to this deadline.
In reality, the exchange period does indeed begin on the same date as the identification period and they run concurrently. However, the exchange period ends at midnight upon the earlier of 180 calendar days after the transfer of the relinquished property or the due date of the exchanger’s tax return (with extension) as “imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.” 4
The bottom line is if you begin a 1031 exchange in the latter part of your tax year, you may not have the full 180 calendar days to complete the exchange. So, be sure to extend your tax return filing deadline to ensure that you have the opportunity to maximize the length exchange period.
Extension of the Identification and Exchange Periods
Extensions of time do exist for date driven acts within the Internal Revenue Code.5 These extensions are available for taxpayers affected by:

Federally declared disasters
Acts of terrorism
Military actions

Specifically related to deferred like-kind exchanges, Revenue Procedure 2007-56 allows extensions of both the 45-day identification and the 180-day completion deadlines. Taxpayers conducting like-kind exchanges are only allowed extensions if the Internal Revenue Service issues guidance or publishes notifications related to the three items listed above. The notice/guidance issued by the Internal Revenue Service will:

Define affected taxpayers
Detail what acts can be extended/postponed
Describe the length of the extension
Define the location of the disaster area

Summary
Whether you’re just considering a like-kind exchange or you are currently in the middle of one, it’s critical to understand the exchange deadlines. As always, be sure to consult with your tax advisor and confirm your understanding of the like-kind exchange stages, their beginning and end dates and any potential extensions of time that might be available to you.
 
1 Knight v. C.I.R., T.C. Memo. 1998-107
2 Reg. Section 1.1031(k)-1(b)(1)(ii)
3 Reg. Section 1.1031(k)-1(b)(1)(i)
4 Reg. Section 1.1031(k)-1(b)(2)(i)(ii)
Long, Jeremiah and Foster, Mary. Tax-Free Exchanges under §1031. Thompson Reuters: used as a critical source in the creation of this post.
5 I.R.C. Section 7508A

As Politico noted in a recent report on The Center for American Progress study, Federation of Exchange Accommodators (FEA) recently responded directly to this report, clarifying inaccuracies, myths and misstatements of the legislative history that were noted to justify repeal of Internal Revenue Code section 1031 (“Section 1031”) (see page 28 in http://cdn.americanprogress.org/wp-content/uploads/2014/09/SteinTaxRefo… report).  While we all support the goal of making the “tax code work better for everyone – not just the wealthy and well connected,” many disagree that repeal or limitation of Section 1031 would further tax reform goals.   Merely deleting code sections in our tax code does not make it simpler or fairer. On the contrary, removing the benefits of like-kind exchanges encourages effectively penalizes business owners who have limited access to capital while hoping to grow operations and maintain their workforce.
 
Lawmakers often rely on sources or themes that might promote good political policy but result in decisions that promote bad economic policies. In order to fully understand why Section 1031 like-kind exchanges create good political, tax and economic policy, let’s review some of the myths surrounding the code section’s original intent noted by the FEA in a formal response.
Myth 1: The Congressional purpose for Section 1031 is no longer relevant
Truth: Section 1031 was enacted in 1921 for three primary purposes, two of which are even more relevant today in our global economy.

Avoiding unfair taxation of ongoing investments to allow taxpayers to maintain investments in property without being taxed on theoretical (i.e. “paper”) gains and losses during the course of a continuous investment.
Encouraging active reinvestment, which encourages the tax-deferred exchange of property, thus promoting transactional activity.

The third primary purpose of the 1921 law had to do with “administrative convenience,” which referred to “the difficulty of valuing exchanged property.” Three years later in 1924, Congress scrapped administrative convenience as a purpose for Section 1031 as being too vague, however this long-defunct third purpose, which the U.S. Treasury Department acknowledges is no longer true, is curiously the only rationale cited by the Treasury for repeal.
Myth 2: The absence of a precise definition of “like-kind” is administratively difficult for the IRS and creates the opportunity for abuse.
Truth: The definition of “like-kind” is well understood. Section 1031 is neither administratively difficult for either the IRS or taxpayers, nor is it abused.
The study, citing the Tax Reform Act of 2014, states that “the current rules have no precise definition of ‘like-kind,’ which often leads to controversy within the IRS and provides significant opportunities for abuse.”
Treasury Regulations in effect since 1991 provide specific frameworks for determining whether assets are “like-kind.” Like-kind exchanges conducted within the regulatory safe harbors under Section 1031 using professional qualified intermediaries are straightforward transactions that follow a well understood set of rules, procedures and documents. Taxpayers claiming tax-deferral treatment must report certain information on IRS Form 8824 with their tax returns. Determination of whether the rules have been complied with is not complicated. Furthermore, professional qualified intermediaries promote compliance, and are subject matter experts who simplify Section 1031 transactions by guiding clients and their tax advisors through the process, providing proper documentation, holding funds and offering other services.
Myth 3: Section 1031 allows taxpayers to avoid capital gains taxes (taxation), and to defer gain indefinitely until the gain and related tax are eliminated at death.
Truth: Under Section 1031, taxes are deferred – not eliminated. At some point the tax gets paid.
The study states that Ways and Means Committee Chairman Dave Camp’s (R-MI) staff “caution that the rules enable investors to defer capital gains taxes for decades or avoid them entirely if the owner of the property dies before realizing their gain for tax purposes.” Citing a journal article, the study also asserts that Section 1031 rules are frequently used to “avoid capital gains taxes on real estate investments.” 
Section 1031 exchanges structured under the IRS regulatory safe harbors using professional qualified intermediaries are neither tax savings vehicles nor “abusive tax avoidance schemes.” Rather, they are legitimate transactions utilizing an important tax planning tool.
Payment of tax occurs:

upon sale of the replacement asset;
incrementally, through increased income tax due to foregone depreciation; or
by inclusion in a decedent’s taxable estate,

at which time the value of the replacement asset could be subject to estate tax at a rate more than double the capital gains tax rate. It should also be noted that taxpayers utilizing Section 1031 exchanges include corporations and other business entities that cannot “take the gain to the grave.”
Myth 4: Like-kind exchanges are used only by the wealthy or well connected. 
Truth: Like-kind exchanges are fair and working well for a broad spectrum of taxpayers at all levels.
Section 1031 is fair, benefiting taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and from small businesses to large entities. Transactions represent taxpayers at all levels, in all lines of business, including individuals, partnerships, limited liability companies, and corporations. An industry survey showed that 60% of exchanges involved properties worth less than $1 million, and more than a third were worth less than $500,000. Exchanged properties include real estate, construction and agricultural equipment, railcars, vehicles, shipping vessels and other investment and business-use assets.  Tax deferral benefits are only available if the taxpayer continues their investment by acquiring like-kind replacement property.  This restriction retains value and stimulates activity within an economic sector that has a positive ripple effect.  Thus, even the relatively rare exchanges of art and classic cars stimulate business for auction houses, galleries, artists, framers, insurers, auto dealers, mechanics, body shops and the like.
Myth 5: Elimination of Section 1031 like-kind exchanges will raise significant revenue.
Truth: When the impacts of the economic stimulus effect of Section  1031 and the effect of depreciation are taken into account, any Treasury revenue raised from elimination of Section 1031 would be negligible.
The study cites the Joint Committee on Taxation’s assertion that the elimination of Section 1031 will raise approximately $41 billion over 10 years.
This ignores the fact that like-kind exchanges are a powerful economic stimulator, encouraging investment in small and medium sized growing businesses and thereby promoting U.S. job growth. Section 1031 exchanges contribute to the velocity of the economy by stimulating a broad spectrum of transactions which, in turn, generate jobs and taxable income through business profits, wages, commissions, insurance premiums, financial services, and discretionary spending by gainfully employed workers.  This transactional activity raises state, local and federal tax revenue through transfer, sales and use taxes and increased property taxes. The loss of this economic stimulus would be costly to the U.S. economy, creating a chilling effect on real estate transactions, reduced demand for manufactured goods and job loss, as many transactions would be abandoned or delayed by taxpayers unwilling or unable to withstand an effective tax on their working cash flow.
With respect to depreciable assets, like-kind exchanges are essentially revenue-neutral because gain deferred is directly offset by a reduction in future depreciation deductions available for assets acquired through an exchange. The tax basis of newly acquired replacement property is reduced by the amount of the gain not recognized due to the exchange of the sold property. Consequently, the taxpayer forgoes an equal dollar amount of future depreciation deductions on the replacement property, resulting in increased annual taxable income over time, taxed at ordinary income tax rates.
Conclusion
We generally all support the goals of tax reform: to achieve a simpler, fairer and flatter tax code that is more efficient and results in a broader tax base, minimized economic distortion, greater financial growth, job creation and a strengthened economy. However, effective reform requires well-reasoned change.  Achieving meaningful reform starts with preserving existing incentives for investment that are proven tools used to spur economic growth and productivity within the United States.
Don’t forget to share your thoughts at https://www.1031taxreform.com”>www.1031taxreform.com.