By: Amanda Wilson
A common tax planning tool for real estate transactions is to engage in a like-kind exchange of real estate. If structured properly, a taxpayer can sell real property (the relinquished property) and replace it with new property (the replacement property”) of a like-kind without having to recognize gain on the sale of the relinquished property. For example, a senior living property owner could sell a facility in Florida and use the proceeds to acquire a new facility in Georgia.
One of the requirements for structuring a like-kind exchange properly is that the taxpayer has to acquire the replacement property within 180 days. For sales of relinquished property that occur in the fourth quarter of the year, this can result in a trap for the unwary that could result in the transaction becoming fully taxable. While the statute does generally provide for a 180 day replacement period, the period is actually the period that ends on the earlier of (i) 180 days from the sale of the relinquished property, or (ii) the due date (including extensions) for the taxpayer’s return for the tax year in which the relinquished property was sold. In other words, if the relinquished property is sold at the end of 2019, taxpayers with open like-kind exchanges should make sure to file extensions for their tax returns even if they are otherwise ready and able to file their returns timely. Failure to do so could blow their like-kind exchanges and trigger a significant tax bill.