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Why is there a 45-Day and
180-Day Rule for 1031 Exchanges?
Time
for some 1031 Trivia!!
As you know, when performing a
Section 1031 Like-Kind Exchange,
you have 45 days to identify your
New Property (calculated from
the date of closing on the sale
of your Old Property), and 180
days to close on the purchase
of your New Property.
But, why did Congress choose these
particular time deadlines? Unfortunately,
the answer to this question is
a bit esoteric. But, here are
the answers -- for what they're
worth!
The
180-day rule was Congress' response
to the second Starker
case (Starker v. U.S.,
602 F.2d 1341 (9th Cir. 1979)).
Starker is the
seminal court case decided in
1979, which first allowed deferred,
as compared to simultaneous, exchanges
that we primarily see today. Starker
upheld a five-year
time period between selling the
Old Property and buying the New
Property! However, Congress decided
that five years was way too long.
The primary reason they originally
passed Section 1031 -- the fact
that the taxpayer's money is still
tied up in the same type of investment
-- was not served by the second
Starker ruling.
In addition, open-ended exchanges
lasting for several years would
create numerous administrative
problems - How does the taxpayer
report the exchange every year?
How does the IRS track each open
exchange? It's more likely that
the exchanger dies during the
exchange, etc. Therefore, Congress
decided that 180-days were plenty
long enough for a taxpayer to
decide whether to continue his
or her investment.
There is much less rationale given
in the legislative history for
the 45-day rule. In fact, there
is virtually no rationale given
whatsoever! We could venture some
guesses, but our opinion is that
the rule is likely arbitrary --
perhaps the result of Congressional
negotiation.
Nevertheless, the 45- and 180-day
rules are here to stay. So, follow
them well, because while their
reason for existence may be esoteric--and
possibly even arbitrary--their
effect is not. They are hard deadlines
with no chance for an extension
short of, literally, an Act of
Congress!
--The
Experts
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