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Failed Exchanges Can Still Defer Taxes by One Year

Exchanges begun after July 5th, that magic time of year, bring into play a little known tax regulation under Section 1031. This regulation allows you to defer tax liability for one year even though a 1031 exchange fails. The general rule is that a 1031x must be reported on the tax return for the year in which the relinquished property sells. Therefore, an exchange started in 2006 must be reported on a 2006 tax return.

There is one exception. An exchange started in 2006, (but not completed by the end of 2006) can be reported in 2007 if the exchange then fails. The gain can be reported in the tax year in which it failed (2007), rather than in the year it was begun (2006).

To reiterate, the gain from an exchange started in one calendar year and still open at the end of the tax year which then fails in the next tax year can be reported in the tax year in which the exchange fails instead of in the year in which the exchange was begun. This rule can allow an exchanger to defer tax liability for a full year even if a 1031x fails.

Fast Solutions in a Slow Market

In a slow market sellers are often asked to carry back part of their sales price.

The following procedures can help:
Upon sale have the note made payable to Several options for including the note as part of the exchange are available:
a) The note can be transferred to the seller of the new property as part of the sales price.
b) The note can be sold to a third party and the cash can be added to the 1031 exchange proceeds, which are then use to by the new property.
c) The exchanger raises new cash and buys the note from 1031x,com. The price can be the face amount of the note or less depending upon the demand for cash upon purchase of the new property. Instead of a low basis, the seller now has a tax basis in the note equal to the price paid for it.

Remember, if a note is carried back and none of the above procedures is followed then tax will be deferred on the note only until the note is paid, at which time taxes will be due. This can drastically effect the tax deferral of the 1031 exchange. Please feel free to contact us prior to signing a sales contract including an owner carry. 1031 exchanges are our business.

Extend Your 1031 Exchange Deadlines

The general rule in a 1031 exchange is that an exchanger may not acquire the replacement property from a related party. There are several exceptions to this rule including a new one. An exchanger may acquire a replacement property from a related party if, in turn, the related party treats the sale of that property as relinquished property in their own 1031 exchange. The related party is thus not cashing out of real estate.

This ruling creates some interesting planning opportunities. If, as an exchanger, you are uncertain about your replacement property you can identify a property owned by an entity that you control. In essence, you can buy from your self. Completing the first exchange by buying a property which you already control, can start another 1031 exchange, effectively extending your 1031 exchange deadlines. For example, you sell property A, titled in your name, and identify property B, owned by your LLC, ”ABC Rental, LLC” as one of your potential 1031 exchange replacement properties. Unable to buy a replacement property from a third party, on the 180th day you buy replacement property from ABC Rental, LLC. This purchase completes the 1031 exchange in your name, and starts a 1031 exchange for ABC Rental, LLC. ABC Rental, LLC then buys a replacement property to finish ABC Rental, LLC’s 1031 exchange. This technique can effectively extend your 1031 exchange deadlines. Both the 45 day identification rule and the 180 day repurchase rule can effectively be extended by as much as 360 days.

We work hard to maximize your tax advantages using 1031 exchange.

By: Steven W. Hickox, Attorney and President of

Comments (1)

Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

Hi, Steven

   We invite you back to ActiveRain in the year 2017!

Mar 11, 2017 06:24 PM