Last Minute 1031 Exchange Planning Tip

I was speaking to one of my clients today who is trying to close on the sale of her relinquished property before the end of the month - June 30, 2010.  I realized as we were discussing her 1031 Exchange transaction that she really did not have any specific reason for closing by the end of the month. 

I suggested that she wait and close on the sale of her relinquished property and start her 1031 Exchange after June 30, 2010 instead of before month end.  The reason is simple.  You never know whether you will be able to complete your 1031 Exchange.  The sale of your relinquished property and the start of your 1031 Exchange triggers your capital gain tax.  Your 1031 Exchange will fail if you can not acquire replacement property with the 180 calendar day exchange period, and the failed 1031 Exchange becomes a taxable transaction.

However, your taxable gain can be pushed into the following tax year if you do not have the right to your 1031 Exchange funds until after your 180 calendar period has passed and the 181st day lands in the following tax year.  This is the reason that I recommended that she wait to close on the sale of her relinquished property until July 2010.  Closing after month end would push her 180th day into 2011 and would at least allow her to defer her capital gain into 2011 even if her 1031 Exchange fails.  This is a little known tax planning tool that is relatively easy to implement unless you absolutely need to close by month end for other reasons.