Year-End Tax Planning When a 1031 Exchange Fails
In the event that a 1031 Exchange fails – that is, if an Investor sells their relinquished property but is unable to identify like-kind replacement property within the required 45 calendar day identification period or acquire some or all of the Investor’s identified replacement properties during the 180 calendar day exchange period – tax deferred treatment no longer applies and the transaction is now taxable. However, taxation may be able to be delayed in some instances, depending on circumstances.
If multiple replacement properties are involved in the same 1031 Exchange transaction and not all of the replacement properties are acquired, then it may result in a partial 1031 Exchange as opposed to a failed one. In many cases, a partial 1031 Exchange may still defer a portion of the depreciation recapture and/or capital gain income tax liabilities.
While depreciation recapture taxes cannot be delayed (it is due in the taxable year in which the Investor sold and closed on their relinquished property, capital gain taxes can be put off until the following income year if the Investor’s 1031 Exchange is put together correctly. Investors should be sure to consult with their Qualified Intermediary about making sure they include the correct language in any agreement to ensure that access to the Investor’s 1031 Exchange funds would not be granted until the following income tax year.
When a 1031 Exchange transaction fails, this form of tax deferral provides a solid safety net, but it is highly recommended when identifying like-kind replacement properties to consult with advisors to ensure that the Investor can take advantage of this short-term income tax planning opportunity should the worst happen. In addition, a Structured Sale can also be added to any 1031 Exchange transaction to provide an additional buffer should the transaction fail; this would allow the Investor to receive their 1031 Exchange profits in the form of an annuity contract from a Structured Sale and the ability to continue to defer the payment of capital gain taxes. Putting together a highly-qualified team of experts is key to making these complex transactions successful, including an attorney, tax accountant, real estate broker, escrow officer, and a 1031 Exchange Qualified Intermediary.
Disclaimer: 1031 exchange made simple does not guarantee the performance of the QI's in our referral network and we can not be held liable for any misrepresentations or mistakes in regards to a 1031 exchange by one of the QI's that we refer to you. 1031 Exchange made simple does not provide tax advice nor can we make representations regarding the tax consequences of an exchange transaction. 1031 Exchange made simple is a 1031 QI Referral Network. 1031 made simple is not responsible (in any way) for the performance, creditability, and financial condition of any QI in our network. In this new economic environment it is imperative that all potential 1031 exchange customers do their own due diligence and research on any QI that they may use, on a 1031 exchange. Please verify and check the validity of the Bonding and Insurance of your QI. It may be wise to have your 1031 exchange accounts set up as separate, individual customer accounts. Our web site is to be used as a information based web site only. All parties doing a 1031 exchange must consult their tax advisors or attorney for this information.
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