updated October 2020
Be sure to read Tax Straddling – Pay Taxes in 2021 or 2022?
Which Year to Choose?
October is now in full force with waves of pink ribbons, pumpkins and scary haunted houses. However being scared is not necessary for those investors hesitant about initiating a 1031 Exchange prior to year end because they fear that they won’t find new property to complete their tax deferred exchange. The good news is that there might be a back-up benefit in store – 1031 tax straddling – which provides added incentive to most taxpayers selling investment property at the end of the year.
If a taxpayer successfully completes a 1031 Exchange, the main benefit is tax deferral. If a taxpayer is not able to purchase new property to successfully complete the 1031 Exchange, the taxes associated with the sale of their investment property will be due. With “tax straddling” the taxpayer may still receive a one year tax deferral thanks to installment sale rules (§453 / Publication 537). Assuming a qualified intent, tax straddling provides added incentive to taxpayers to sell their relinquished properties near year-end to take advantage of the significant tax-deferral benefits of 1031 Exchanges with the one-year deferral benefits of §453 as a back-up plan.
How does this work? In a tax deferred exchange, taxpayers typically have 45 days from the sale of the old property to identify potential replacement property and 180 days to purchase the identified property. 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 2014 and receive their funds back from the Qualified Intermediary in 2015, have the option of deferring payment of taxes on the profits from their sale until 2016 – the due date of their 2015 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.
The IRS does not penalize investors for attempting to complete a 1031 Exchange. Tax straddling just provides added incentive to taxpayers selling investment property at the end of the year. Why not attempt to complete a 1031 Exchange when a one year deferral is available as the back-up plan?
Taxpayers should consult with their tax advisors since tax straddling does not apply to all sales, and any gain attributed to debt relief will still have to be recognized in the year of sale. Please call us at IPX1031 to discuss tax straddling and other valuable tax-deferral solutions which can provide taxpayers unable to successfully complete exchanges with generous tax-deferral safety nets. Be sure to consult with your tax advisor to determine if you can take advantage of these valuable tax-deferral methods.
And in all of the hustle, please remember with National Breast Cancer Awareness month to go above and beyond pink in efforts to improve care and continue bring attention to this disease. More than 230,000 women and 2,000 men will be diagnosed with breast cancer in America this year, and one in eight women will be diagnosed with breast cancer in their lifetime, making it the most commonly diagnosed cancer in women. Breastcancer.org and the National Breast Cancer Foundation are two of many breast cancer awareness and education sites online. Education, early detection and awareness are key. Let’s help beat this disease.