What Are the Deadlines for a Section 1042 Rollover?

A Section 1042 rollover allows owners of privately-held C corporation stock to defer capital gains taxes when they sell their shares to an Employee Stock Ownership Plan (ESOP). This tax strategy requires the sale proceeds to be reinvested into specific types of investments. To successfully execute this deferral, sellers must navigate a series of deadlines established by the Internal Revenue Code.

The Replacement Period Deadline

The first timeline is the “replacement period,” which dictates when a seller must acquire Qualified Replacement Property (QRP). This period begins three months prior to the date of the sale to the ESOP and concludes 12 months after the sale date, spanning a total of 15 months. This window provides the timeframe for the seller to purchase the securities that will replace the company stock they sold.

For example, if a shareholder sells their stock to an ESOP on June 15, 2025, the replacement period starts on March 15, 2025. The deadline to complete the purchase of all QRP would be June 15, 2026. This 12-month post-sale deadline is fixed and relates only to acquiring the investment assets. Failing to reinvest the proceeds within this window disqualifies the transaction from tax deferral under Section 1042.

The Election Filing Deadline

Separate from the investment timeline is the deadline for formally notifying the IRS of the intent to defer the gain. This is done by filing a “Statement of Election” with the seller’s federal income tax return for the year in which the sale occurred. The deadline for this filing is the due date of that tax return, including any extensions.

The Statement of Election must contain specific details about the transaction, including:

• A description of the securities sold to the ESOP
• The date of the sale
• The seller’s cost basis in the stock
• The total amount realized from the sale

The seller must also attach a notarized “Statement of Purchase.” This document identifies the QRP that was purchased, the date of purchase, and its cost, and it must be notarized within 30 days of the QRP purchase.

Requesting an Extension

A seller can extend the deadline for filing the election paperwork. By filing for a standard tax return extension, such as using Form 4868 for individual taxpayers, the due date for the tax return is pushed back, usually to October 15th. This action extends the deadline to submit the Statement of Election and the Statement of Purchase to the new filing date.

This extension provides additional time to organize the necessary tax documentation. However, an extension to file a tax return does not extend the replacement period. The 12-month deadline for purchasing QRP remains tied to the original sale date and is independent of the tax filing due date. A seller who files an extension but fails to buy QRP within the 12-month window will lose the tax deferral benefit.