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 property (other than liability relief) prior to QI’s bankruptcy or receivership proceeding.
For those who qualify, this development could mean substantial money and time saved. It is unfortunate many were hurt by the recklessness which took hold of the 1031 exchange industry (LandAmerica comes to mind) but steps like Rev. Proc. 2010-14 go a long way in providing some solace now and enhanced protection in the future.