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QI Default? Rev. Proc. 2010-14 can help

For those who saw their exchange funds evaporate due to a QI declaring bankruptcy, yet still owed taxes on capital gains, Rev. Proc. 2010-14 may provide a much needed solution. Previously, taxpayers who fell victim to a QI default, were obligated to recognize the “gain triggered upon transfer of relinquished property in the tax year in which the transfer occurred.” Rev. Proc. 2010-14 ensures that if an exchange falls apart due to a QI bankruptcy, “gain is deferred until the tax year net liability relief exceeds basis and/or payments attributable to relinquished property are received as a result of the bankruptcy or receivership proceeding.” This applies retroactively to all exchanges past January 1, 2009. In order for taxpayers to utilize Rev. Proc. 2010-14, they must meet four requirements:
Transfer (or be deemed to transfer) relinquished property to a QI in accordance with § 1.1031(k)-1(g)(4) (the QI safe harbor); Properly identify replacement property within the 45 day identification period (unless the QI default occurs during that period); Fail to complete the like-kind exchange solely due to a QI that becomes subject to a bankruptcy or receivership proceeding; and Do not have actual or constructive receipt of proceeds from sale of relinquished ... more

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