Revisiting Year-End Planning for Failed 1031 Exchanges

It seems like it was just January 2007. Where did 2007 go? We have less than two months to go before we celebrate the new year, so it is now time to discuss year-end tax planning for 1031 exchange transactions that have failed.

What happens when a 1031 exchange starts toward the latter part of 2007, but fails because the investor could not find and identify suitable like-kind replacement property or was not able to actually acquire the property identified?

Failed 1031 exchanges become taxable. The question is in which year is the depreciation recapture and capital gain recognized and taxable? The answer depends on when the investor has the legal right to access the 1031 exchange funds.

If the 45 calendar day identification period and/or the 180 calendar day exchange period end in the following income tax year and the Tax Deferred Exchange Agreement contain the appropriate language, the depreciation recapture would be recognized and taxable in the year of sale and the capital gain would be recognized and taxable in the following year when the investor has the legal right to access the funds.

Learn more at: http://www.exeter1031.com/articles_failed_1031_exchange.aspx.