Tax season can be a stressful time of year, even for your CPA! There are important deadlines and specific steps to handle your tax forms. If you completed a 1031 exchange during the previous tax year, here are some steps you can take to prepare your taxes:
Gather Documentation: Make sure you have all the documentation related to your 1031 exchange, including the purchase agreement, settlement statement, and identification of replacement property. From DST Sponsors you can expect to receive either k-1s, or 1099s/Grantor letter. The entity in which you own your beneficial interests may impact how and when you file your taxes. You will need these documents when filing your tax return.
Determine Your Tax Liability: Each state has different filing standards. Even if you completed a 1031 exchange, you may still owe state income taxes on the sale of your relinquished property. Consult with your CPA to determine your tax liability and whether you need to make estimated tax payments.
Report the Exchange on Your Tax Return: You must report your 1031 exchange on your tax return for the year in which the exchange took place. You will need to provide details about the transaction and any gains or losses incurred.
Understand the Tax Implications of Future Sales: If you plan to sell the replacement property that you acquired through the 1031 exchange, you may incur capital gains taxes on the sale.
Keep Accurate Records: It's important to keep accurate records and documentation of your 1031 exchange transaction in case of an audit. Make sure you have copies of all relevant documents and keep them in a safe place.
Important Tax Dates for 1031 Investors
For individual investors and most small businesses, business tax deadlines for 2023 are on April 18, 2023. Multi member LLCs, S-Corporations and Partnerships, however, must have filed tax returns by March 15, 2023. (Some may still be waiting for their Grantor Letters from Sponsors, in which case filing extensions are required.) The deadline to file your Extended 2022 Tax Return is October 16, 2023.
Audit Period: The IRS has three from the due date of your tax return to audit your 1031 exchange transaction. It's important to keep accurate records and documentation of your exchange to avoid any issues with an audit.
Remember, it's important to note that tax laws and regulations can change, so it's always a good idea to consult with a tax professional for the most up-to-date information and guidance on your specific situation.