updated October 2020
Be sure to read Tax Straddling – Pay Taxes in 2021 or 2022?
1031 Tax Straddling for 2014
With the end of 2013 approaching, there are investors selling real estate who are not sure whether to initiate a 1031 Exchange because they are concerned about securing replacement property. One thing to keep in mind is that the IRS does not penalize investors for attempting to complete a 1031 Exchange. However, if investors cannot successfully complete their 1031 Exchange, the taxes associated with the sale of their investment property will be due. The good news is at this time of the year, there may be a silver lining. “Tax straddling” may be an option where the taxpayer receives a one year tax deferral.
How does it work? Once a 1031 Exchange is initiated, if replacement property is not purchased to complete the exchange, the earliest the Qualified Intermediary can return the taxpayer’s funds is on the 46th day (the day after the identification time period has ended) or, in some cases, the 181st day (the day when the 1031 Exchange time period is complete). Taxpayers who enter into a 1031 Exchange during the fourth quarter of 2013 and receive their funds back from the Qualified Intermediary in 2014 have the option of deferring payment of taxes on the profits from their sale until 2015 – the due date of their 2014 tax return. Combining §1031 with §453 permits the cash received from the Qualified Intermediary at end of the exchange to be treated as a payment in the year of actual receipt, rather than in the year the property was sold.