1031 Exchanges: What's Good Faith Got to Do With It?

Nothing, as it turns out.

You may have carefully planned your exchange down to the last detail. You’ve noted the deadlines and proceeded with caution. But even the savviest investor can hit a roadblock along the way.

So how forgiving is the IRS when it comes to consideration of extenuating circumstances that force you to miss a critical deadline? 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 rule was absolute. They denied the Knight’s exchange.

The IRS isn’t all that sympathetic to the “good faith” argument. So the bottom line is just don't miss any deadlines.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.