Is Good Faith Enough For A 1031 Exchange?

Even investors with the best intentions sometimes hit a roadblock that threatens to derail their carefully planned 1031 exchange. So how forgiving is the IRS when it comes to extenuating circumstances? Not very.

Countless cases exist where taxpayers missed deadlines by just a few days and saw the IRS deny their exchange. For example, take the 1998 case of Knight v. Comm. In it, the Knights were supposed to close on their replacement property on the 179th day; however the deal unexpectedly fell through.

The Knights went on to acquire another replacement property shortly after the 180 days expired, and argued to the IRS that they had made a “good faith” effort to comply with the time requirements. However, the IRS said that the 180 day deadline was not flexible and good faith was not enough. The exchange was denied.

To avoid such a scenario, investors should plan to close on their replacement property far in advance of the 180th day.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.