1031 Exchange Q and A: Unbuilt Property, Incidental Property, and IRS Deadlines

Bill owns a car wash in Chicago, Illinois. He wants to use Section 1031 to exchange his car wash for a tenancy-in-common interest in a shopping mall in Tuscan, Arizona, that will be built next year.

Can he exchange the real property involved in his car wash for real property that is not yet built?

What about the equipment and machinery used in the car wash?

Allso, Bill knows that under Section 1031, he has 180 days from the transfer of his car wash to identify replacement property and complete the exchange. He expects to transfer the car wash in late November, so he figures he has until late April to complete the exchange.

What would you advise Bill?

Bill can exchange his property for replacement property that is not yet built, so long as the replacement property is completed prior to the expiration of the 180 days.

The equipment and machinery used in the car wash (referred to as “incidental property” in Section 1031 exchanges) can be part of the exchange, so long as it meets the requirement that it is typically transferred with the real property of a car wash in standard commercial transactions and the total market value of the incidental property does not exceed 15% of the market value of the real property involved in the exchange.

Bill needs to be very careful if he transfers his relinquished property anytime after October 18.

Remember that the actual deadline for completing an exchange is the earlier of either 180 days from the date you transfer the relinquished property – or the date, including extensions, that your tax return is due for the year in which you transfer the relinquished property. Exchangers must report their exchanges on the tax return for the year in which the exchange begins.

Thus, if you relinquish property after October 18, you actually have less than 180 days to complete the exchange, unless you file for an extension.

If Bill transfers his car wash in late November, he should expect to file for an extension on his tax returns, unless he is absolutely certain that he can complete the exchange before April 15.

For more information on this topic, and for everything you need to know about 1031 exchanges, see our book 1031 Exchanges Made Simple, available at Amazon.com.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

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