What to do When Your 1031 Exchange Fails

Despite the best preparation – 1031 exchanges sometimes fail. But there are options for salvaging what’s left of your exchange. In this article, we are going to discuss some options for what to do when your 1031 exchange of real estate fails.

What Happens When a 1031 Exchange Fails?

First off, what do we mean when we say “failed” 1031 exchange? A failed 1031 exchange is an exchange in which the taxpayer is not able to defer their capital gains taxes on the sale. Failed exchanges can be caused by a number of factors, including:

• Constructive receipt of taxable boot by the taxpayer conducting the exchange

• Failure to complete the exchange process within the 180 day time period

• Failure to abide by the property identification rules, qualifying purpose rules, or any other guidelines set out by the IRS for 1031 exchanges.

1031 Exchange Companies

At CPEC1031, we have over two decades of experience working with clients in all different business sectors on their 1031 exchanges of real estate. With the level of experience, we bring to the table, you can rest assured that your exchange is in good hands. We can help you organize all the elements of your exchange, including your documentation and replacement properties. Contact us today at our downtown Minneapolis office to set up a time to chat about your exchange with one of our intermediaries.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

How to Mitigate the Consequences of a Failed 1031 Exchange

What are some ways that you can mitigate the adverse tax consequences of a failed or partially failed 1031 exchange? In this blog, we'll offer some strategies by examining a recent transaction that one of our clients did in Rochester, MN.

A 1031 Example

Recently we had a transaction in Rochester Minnesota where the taxpayer sold a $2,000,000 replacement property, and identified four million dollars of new replacement properties. After the 45th day had elapsed, their due diligence investigation of the replacement properties turned up some issues that made them rethink whether they really wanted to buy that replacement property.

In the end, those folks in Rochester Minnesota decided not to buy the replacement property, and so they were stuck thinking “well if we don't buy the replacement property we're going to have to recognize that gains on the sale of our old relinquished property. What are some things that we can do to alleviate the potential tax hit that we've got coming this year?”

Mitigating the Gain

A couple of different strategies can be used to offset or mitigate the tax gain. One of them is to use your exchange funds to buy interests in oil and gas exploration - what are called intangible drilling expenses.

By buying investments that have an immediate tax deduction for the intangible drilling rights you may spend a dollar but receive back $0.75 or $0.80 of immediate tax deduction. If you invest heavily enough in oil and gas exploration that you're allowed at least enough deductions to offset the gains that you’re incurring, you may be able to offset or wash all of the gains that you experience from the sale of your relinquished property by manufacturing immediate tax deductions through the intangible drilling rights.

• Start Your 1031 Exchange: If you have questions about how to mitigate the consequences of a failed exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved