Failed 1031 Exchange May Be A Win At Tax Time


How many of us would jump at the chance to forego (even if only for twelve months) payment to the IRS without a penalty or any interest. If you are an Investor who utilizes a 1031 Exchange but are unable to complete your exchange you may be able to utilize the Installment Reporting method. By doing so you would be able to delay payment of your tax on the proceeds until the following tax year!

The terms of a normal exchange agreement call for the exchange period to end on or before the end of the expiration of midnight on the earlier of (i) the 180th day after the date upon which the Exchangor has transferred the Relinquished Property or (ii) the due date (including extensions actually obtained) for Exchangor’s tax return for the taxable year in which the transfer of the Relinquished Property occurs. This time of year brings questions from many Exchangor’s wishing to defer tax but also wondering if they have funds left that have not been used to purchase replacement property when will the tax be due on those funds.

Lets say that your exchange Relinquished Property closed any time after July 5, 2010 this date means that you have the potential of straddling a tax year with your exchange. In the case of closing on July 5, 2010 your 180th day would be January 1, 2011. If you made a valid identification of replacement property during your 45 day identification period but you did not utilize all of your exchange proceeds to purchase replacement property or your exchange failed then you would receive the balance of your proceeds on January 2, 2011.

Ask your tax consultant if you can report the proceeds under the IRC Section 453 (Installment Sales Basis).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Brigitte Echave, Leverage Exchange Group | Attorney Advertising

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