Should You Do a 1031 Exchange Before the End of 2024?

The end of 2024 is right around the corner. The end of the year is a time when many people do last-minute tax planning so that they can minimize their tax bill in April. Since 1031 exchanges offer significant tax benefits, does this mean that you should try to close an exchange before December 31? Find out from a 1031 exchange intermediary at 1031 National Services.

Starting a 1031 Exchange By December 31 Provides Increased Flexibility

Like-kind exchanges offer different types of tax benefits than most end-of-year tax planning strategies. While these strategies typically focus on allowing taxpayers to reduce their taxable income, 1031 exchanges provide indefinite capital gains tax deferral. As a result, tax year considerations are less important when it comes to 1031 exchanges—although there are still some end-of-year planning considerations that are worth understanding.

As a general rule, taxpayers “must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with [their] tax return for the year in which the exchange occurred.” For federal tax purposes, a 1031 exchange generally “occurs” when the purchase of the replacement property is completed. Thus, even if you start a 1031 exchange in 2024, if you don’t complete it until 2025, the exchange will be deemed to have “occurred” in 2025.

But, there are a couple of ways that timing can come into play. First, once you start a like-kind exchange, you have 180 days to complete the exchange unless your tax return is due earlier. If your tax return is due in less than 180 days, you must complete the exchange before Tax Day, or else file for an extension.

Second, if a 1031 exchange fails, this triggers immediate liability for the capital gains tax owed in the relevant tax year. However, if you work with a 1031 exchange intermediary that retains the funds from the sale of your relinquished property until at least January 1, 2025, you have the ability to choose whether to report the gain for 2024 or 2025. If you choose 2025, this effectively provides a one-year deferral on your capital gains tax liability from the transaction. But, if you could benefit from recognizing the gain on your tax returns for 2024, you have the ability to choose this option instead. This is based on the tax rules for installment sales—and both options are equally legitimate.

There Are No Tax Benefits to Delaying the Start of a 1031 Exchange Until January

While there can be benefits to starting a 1031 exchange by December 31, there really aren’t any tax benefits to delaying the start of a 1031 exchange until January (other than avoiding the potential need for an extension). If you wait until January 2025 to start your exchange, the standard 1031 exchange deadlines will apply, and you will almost certainly be reporting the exchange on your returns for the 2025 tax year. So, if you are considering an exchange, it may be worth starting the process now—before the end of 2024—so that you have the additional flexibility discussed above.

Ultimately, Making Sure You Can Meet the 1031 Exchange Deadlines is Most Important

With that said, unless you are willing to have the sale of your relinquished property treated as an installment sale, the most important factor when choosing the start date for a 1031 exchange is your ability to meet the various deadlines that apply. If you have concerns about meeting these deadlines, you may want to wait—or you may want to talk to a 1031 exchange intermediary about conducting a delayed exchange.

Failure to meet any of the deadlines that apply can result in loss of like-kind exchange treatment, meaning that any tax liability triggered by the sale of your relinquished property will not be eligible for deferral. This can result in the loss of significant tax savings and limit the amount that you have available to reinvest. In other words, while it might make sense to start your 1031 exchange before the end of 2024, it also might not. Ultimately, you will need to make an informed decision based on your specific circumstances.

Speak with a 1031 Exchange Intermediary at 1031 National Services

Do you have questions about conducting a like-kind exchange in 2024 or 2025? If so, we can help, and we invite you to get in touch. To speak with a 1031 exchange intermediary at 1031 National Services in confidence, please call 888-872-1031 or request a free consultation online today.