The Exchange Period

Its second limb is a calendar accident that penalizes taxpayers who close in the fourth quarter. Its third element is not a deadline at all, but a substantive requirement that what the taxpayer receives be the property that was identified.

26.1 The one-hundred-eighty-day period and the receipt requirement

The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the one hundred eightieth day thereafter or the due date, including extensions, for the taxpayer's return of tax for the taxable year in which the transfer of the relinquished property occurs.¹

Identified replacement property not received before the end of the exchange period is treated as property which is not of a like kind to the relinquished property.²

Receipt has two elements, and the second is where exchanges are lost. Identified replacement property is received before the end of the exchange period only if the taxpayer receives the replacement property before the end of the period and the replacement property received is substantially the same property as identified. Where the taxpayer identified more than one replacement property, the test is applied separately to each.³

Substantially the same property. The regulation supplies three illustrations, and together they mark the boundary more usefully than any abstract formulation.

In the first, the taxpayer identified two acres of unimproved land, and the owner erected a fence on the property after the identification but before the transfer. The erection of the fence did not alter the basic nature or character of the property as unimproved land, and the taxpayer was considered to have received substantially the same property as identified.⁴

In the second, the taxpayer identified real property Q, a barn on two acres of land with a fair market value of $250,000, of which $187,500 was attributable to the barn and its underlying land and $62,500 to the remaining land. The taxpayer received the barn and the underlying land for $187,500 and paid $62,500 to the other party. The barn and underlying land differ in basic nature or character from real property Q as a whole, and the taxpayer was not considered to have received substantially the same property as identified.⁵

In the third, the taxpayer identified real property R, two acres of unimproved land worth $250,000, and received one and one half acres for $187,500, again paying $62,500 to the other party. The portion received did not differ from the basic nature or character of real property R as a whole, and its fair market value was seventy-five percent of the whole. The taxpayer was considered to have received substantially the same property as identified.⁶

The distinction is qualitative before it is arithmetic. Both the second and third taxpayers took seventy-five percent of the identified value. One carved a building and its footprint out of a parcel and took a functionally different thing. The other took less of the same thing. Only the second failed.

Two corollaries for practice.

Acquiring part of what was identified is comparatively safe where the part is homogeneous with the whole, and dangerous where the part is functionally distinct from it. A taxpayer trimming acreage is in a different position from a taxpayer taking the improved portion of a mixed parcel.

Where a partial acquisition is foreseeable, the identification should describe what will actually be acquired, as 25.5 counsels, rather than describing the whole and trimming at closing. The identification is amendable until day forty-five under 25.6 and not afterward, and the receipt test is applied against whatever the identification said.

26.2 The return-due-date limitation and the extension remedy

The second limb of the period is a trap that operates by calendar accident and defeats taxpayers who have done everything else correctly. The exchange period ends on the earlier of the one hundred eightieth day or the return due date including extensions, so a taxpayer who relinquishes property late in the year has fewer than one hundred eighty days unless the return is extended.

The regulation states the mechanics in its own example. A calendar-year corporation transferred relinquished property on November 16, 1992. The identification period ended at midnight on December 31, 1992. The exchange period ended at midnight on March 15, 1993, the due date for the return for the year in which the transfer occurred. If the corporation was allowed the automatic six-month extension for filing its return, the exchange period instead ended at midnight on May 15, 1993, the one hundred eightieth day after the transfer.⁷

Note precisely what the extension accomplishes. It does not extend the exchange period beyond one hundred eighty days. It removes the earlier of two ceilings so that the full one hundred eighty days become available.

For a calendar-year individual the threshold falls on or about October 17. Counting one hundred eighty days forward from October 17 in a year of ordinary length reaches April 15. Any relinquishment after that date has its one hundred eightieth day falling after the unextended due date, and the exchange period is truncated by the difference. The threshold shifts by a day in leap years and shifts again where April 15 falls on a weekend or a legal holiday, so the date should be computed for the year in question rather than carried in memory.

The counsel that follows is unconditional. Where relinquished property closes in the fourth quarter, an extension should be filed for the year of the relinquishment as a matter of routine rather than in response to a problem, because by the time the problem is visible the deadline has usually passed. The cost is a form. The cost of omitting it can be the entire deferral.

Two related points belong with it.

The period is measured by the due date rather than by the filing date, so filing early does not shorten the period by the regulation's terms. A taxpayer nonetheless should not file the return for the year of the relinquishment before the exchange is complete. The exchange is reported for that year on Form 8824, and reporting a transaction that has not yet occurred is not a position worth taking in order to file sooner.

An extension of time to file is not an extension of time to pay. A taxpayer whose exchange ultimately fails after an extension has been filed owes the tax with interest from the original due date, and that consequence should be stated when the extension is recommended.

26.3 Computation, weekends, and holidays

Both periods begin on the date the taxpayer transfers the relinquished property, which means the forty-five days are the first forty-five of the one hundred eighty and the two clocks run concurrently rather than in sequence. The transfer date is day zero, and each period ends at midnight on the numbered day thereafter.

Property is transferred when it is disposed of within the meaning of section 1001(a).⁸ That is a substantive test rather than a recording convention. Where funding, delivery of the deed, and recordation fall on different days, the transfer date is the day on which the disposition occurred, and the file should record a considered determination rather than adopting whichever date a title company printed on a settlement statement.

Where more than one relinquished property is transferred on different dates as part of the same deferred exchange, both periods are determined by reference to the earliest date on which any of the properties are transferred.⁹ A taxpayer disposing of a portfolio over three months does not obtain a fresh period with each closing. The practical consequence is severe and easily missed: a later closing in the same exchange may occur after the identification period has already ended.

Weekends and holidays do not extend either period. The regulation fixes the end of each period at midnight on a numbered day and states no exception for the character of that day. Section 7503 provides that where the last day prescribed under authority of any internal revenue law for performing an act falls on a Saturday, Sunday, or legal holiday, the act is timely if performed on the next succeeding business day, and it applies only where an act is required under an internal revenue law to be performed on or before a prescribed date or within a prescribed period.¹⁰ Whether that section could reach an identification, which is a condition of a nonrecognition benefit rather than an act the law requires anyone to perform, has never been resolved by published authority. What is clear is that neither the regulation nor the Service's administration of it recognizes any weekend or holiday extension, and that the disaster postponement examined at 26.4 exists because relief comes by specific grant and not by general rule.

A deadline falling on Christmas Day is a deadline falling on Christmas Day. Planning on any other assumption is indefensible, and the same is true of the assumption that a wire sent on the following Monday will be treated as sent on the preceding Saturday.

The operational discipline is to compute both dates at the relinquished property closing, to confirm them to the client in writing, and to work to internal dates several days earlier. Intermediaries compute these dates as a matter of course, and counsel should verify the computation independently rather than adopt it.

26.4 Disaster-relief postponement

The one recognized mechanism for extending either period is postponement on account of a federally declared disaster, granted under the authority of section 7508A and administered through section 17 of Revenue Procedure 2018-58. The relief is broader than practitioners generally assume, and the eligibility grounds in particular reach taxpayers nowhere near the disaster.

The postponement. The last day of a forty-five day identification period, the last day of a one hundred eighty day exchange period, and the last day of a period set forth in section 4.02(3) through (6) of Revenue Procedure 2000-37, that fall on or after the date of a federally declared disaster, are postponed by 120 days or to the last day of the general disaster extension period authorized by the Service in announcing relief for that disaster, whichever is later.¹¹

The ceilings. In no event may the postponement extend beyond the due date, including extensions, of the taxpayer's return for the year of the transfer, or beyond one year.¹²

The first ceiling connects directly to 26.2 and supplies a further reason for the routine extension recommended there. A taxpayer who did not extend the return may find a disaster postponement capped at the unextended due date, which in a fourth-quarter relinquishment can reduce a 120-day postponement to a few weeks or to nothing.

Eligibility. A transferor qualifies only if the relinquished property was transferred on or before the date of the disaster, or, in a parking transaction under Revenue Procedure 2000-37, qualified indicia of ownership were transferred to the exchange accommodation titleholder on or before that date.¹³ The transferor must in addition either be an affected taxpayer as defined in the news release or other guidance announcing relief for the disaster, or have difficulty meeting the deadline because of the disaster for one of the reasons the revenue procedure lists.¹⁴

The listed reasons are the part most often overlooked, because none of them requires the taxpayer to be located in the disaster area:

• the relinquished property or the replacement property is located in the covered disaster area;
• the principal place of business of any party to the transaction is located in the covered disaster area, and the revenue procedure names the qualified intermediary, the exchange accommodation titleholder, the transferee, the settlement attorney, the lender, the financial institution, and the title insurance company as examples of such parties;
• any party to the transaction, or an employee of such a party who is involved in the transaction, is killed, injured, or missing as a result of the disaster;
• a document prepared in connection with the exchange, such as the agreement with the qualified intermediary or a deed, or a relevant land record, is destroyed, damaged, or lost as a result of the disaster;
• a lender decides not to fund a real estate closing, permanently or temporarily, because of the disaster, or refuses to fund because flood, disaster, or other hazard insurance is unavailable because of the disaster; or
• a title insurance company is unable to provide the policy necessary to settle or close the transaction because of the disaster.¹⁵

The reach is wide. A taxpayer in an unaffected state whose qualified intermediary is headquartered in the disaster area qualifies on the second ground, and so does a taxpayer whose lender withdraws because hazard insurance has become unavailable.

Property damaged after identification. A provision that is genuinely obscure and occasionally decisive extends the postponement to the last day of an identification period that fell before the date of the disaster, where an identified replacement property is substantially damaged by the disaster.¹⁶ A taxpayer whose identification closed in August, and whose identified building is destroyed in October, is not without a remedy merely because the forty-five days had run.

A limitation to note. Where the taxpayer qualifies for relief on any ground other than being an affected taxpayer, the taxpayer is not considered an affected taxpayer for purposes of any other act listed in the revenue procedure or in the guidance issued for that disaster.¹⁷ Relief obtained because the intermediary sits in the disaster area extends to the exchange deadlines and not to the taxpayer's other filing and payment obligations.

The relief is self-executing in the sense that nothing is filed to claim it. It is not automatic in the sense that nothing need be established. The taxpayer must actually qualify, and the ground should be documented when it arises, because the position will be evaluated long afterward against a Form 8824 reporting dates that fall outside the ordinary periods.