When is a Failed 1031 Exchange Taxed if it Crosses Over into the Following Year?

In some cases, taxpayers who engage in a 1031 exchange will get back unused 1031 proceeds in the year following the sale of their relinquished property. This could happen at the end of their 180 day exchange period because they were not able to (or decided not to) purchase all of their identified replacement properties.

For example, a person may start their exchange in August of 2021 and later receive their unused 1031 funds in January of 2022. When this happens they may wonder when they are going to be taxed on the money - in 2021, the year that the sale occurred, or in 2022, when they actually received the money.

Treasury Regulations

The Treasury Regulations for Section 1031 allow people to elect to treat a tax deferred exchange as an installment sale to the extent that the person receives cash (known as “boot”) in a subsequent tax year. This can happen if the exchanger fails to acquire some or all of their replacement properties, leaving cash boot in the hands of the qualified intermediary until the year following the sale. The cash received from the qualified intermediary at the end of the exchange period may be treated as a payment in the year it is actually received by the person for purposes of the installment sale reporting rules rather than in the year the relinquished property was sold.

On the Other Hand...

Any liens, deeds of trust, mortgages or other debts that were paid off on the sale of the relinquished property are treated as a payment in the year of the sale (when they were discharged or assumed by the buyer). Nevertheless, the tax deferral allowed by the interplay between Section 1031 and the installment reporting rules under Section 453 can produce a really nice tax advantage where gain must be recognized as the result of a wholly or partially failed exchange resulting in some unused 1031 funds going back to the seller.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

The Negative Implications of a Failed 1031 Exchange

In a 1031 exchange there are some pretty brutal and harsh deadlines that you have to meet in order to have a successful exchange. Here are some tips for meeting those deadlines.

Identify by Day 45

You have to identify your replacement property by midnight of the 45th day. If you miss that deadline you are SOL (Statutorily Out of Luck) because the statute says you have to have sent your identification in before midnight of the 45th day.

Fax, Email, Snail Mail

Sometimes taxpayers doing exchanges will fax, e-mail, or FedEx identification to their intermediary so that they have some recorded documentation that it was sent within the proper time frame. If you go to the mailbox and drop your identification in a stamped addressed envelope to the intermediary on the last day of the exchange you may have sent it but you may not have any proof that it was sent, especially if the postal employee doesn't pick up the mail from the mailbox and the letter isn't actually postmarked until a day or two later when it is processed at the mail-sorting service.

To be on the safe side, send the identification by fax and email, and if you want to you can also mail it and try to get the letter postmarked by going directly into a postal office and handing the letter to the postal employee before midnight of the 45th day.

CPEC1031

At CPEC1031, LLC, we work with people in Minnesota and across the country on their 1031 exchanges of real estate. Our qualified intermediaries have over two decades of experience in the 1031 exchange industry. We can help you defer your capital gains taxes on the sale of real estate. Contact us today at our Minneapolis office to learn more!

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Did You Know? A Failed 1031 Exchange May Qualify for Installment Sale Treatment

It is possible that a seller (intending to conduct a 1031 exchange, but failing to identify or properly receive replacement property) to be able to defer the income tax consequences from the failed 1031 exchange into the following income tax year. If the deferred exchange where the funds are held by a qualified intermediary fails, the seller should still be entitled to installment sales treatment when the proceeds or non like-kind property are received. This can be much better than recognition of the gain in the income tax year in which the relinquished property is closed.

Internal Revenue Code

The provisions of IRC §453 specifically contemplate that the installment sale rules and the like-kind exchange rules of IRC §1031 may apply to the same transaction.

• 453(f)(6) provides that in the case of an exchange which only partly satisfies the nonrecognition of gain rules under §1031 because of the receipt of boot, the taxpayer’s ability to use installment sale treatment with respect to the boot is determined by excluding from the installment sale computations

• any qualifying like-kind property received by the taxpayer and

• the gain not recognized as a result of such like-kind property.

Contact CPEC1031

If you’re looking for help with your commercial transaction, you’ve come to the right place. CPEC1031 has been facilitating commercial real estate deals for decades. We have the knowledge and experience to ensure that your next commercial transaction is a great success. Contact us today to get help with your commercial real estate transaction. Our primary office is located in downtown Minneapolis, but we also work with clients across Minnesota and the United States.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How 1031 Exchanges Fail

Without the proper planning and precautions, 1031 exchanges can fail. In this article, we are going to talk about how 1031 exchanges fail and how to avoid a failed 1031 exchange.

Constructive Receipt

Perhaps the biggest reason that 1031 exchanges fail is that the taxpayer conducting the exchange receives boot during the exchange process. Boot can come in many forms.

If you take constructive receipt of any boot throughout the process, you can end up with a failed or partial exchange. To prevent this, make sure you take care to avoid receiving boot at all times during your exchange period.

Failure to Meet the Requirements

Your 1031 exchange can also fail if you do not meet the numerous requirements set out by the IRS. If your exchange does not complete within the allotted 180 day time period, your exchange will fail. If your property fails to meet the 1031 exchange requirements (like-kind, qualifying purpose), your exchange will fail. If you do not go up in value, equity, and debt on your replacement property, your exchange will fail. Be sure to check off all the appropriate boxes and work with your qualified intermediary to make sure your exchange meets all the necessary requirements.

Qualified Intermediaries in Minnesota

Looking for a qualified intermediary in Minnesota? You’ve come to the right place! At CPEC1031, our intermediaries have over twenty years of experience facilitating exchanges throughout Minnesota and the United States. We can help you identify replacement property, prepare your 1031 exchange documents, and more! Contact us today to learn more about our qualified intermediary services and get your exchange started! Our main office is located in the heart of downtown Minneapolis, but we work with taxpayers throughout the United States on their exchanges of real estate.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

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