Is It Better To Sell My Relinquished Property in 2009 Or Postpone Until 2010

Taxpayers have only four more business days to get transactions structured and closed until 2010 hits us right between the eyes.  First of all, yikes, where did 2009 go?  Second of all, thank God we are moving into 2010, which promises to be a much better year than 2009.

Closing By Year-End

Now to the question of when to close on the sale of your relinquished property.  It has always boggled my mind during the 24 years that I have been in the 1031 Exchange industry that so many taxpayers want to close on their relinquished property before year-end when they are structuring a 1031 Tax Deferred Exchange. 

Why put so much pressure on yourselves?  Its a tax-deferred exchange, so its tax deferred and it shouldn't matter when you close on the sale of your property assuming that all other relevant factors are equal.  However, let's discuss some of the basic reasons why, and then get to the question. 

The Buyer

Certainly, the buyer may wish to close by December 31st in order to obtain any number of benefits, including tax benefits, of owning the property before year-end.  The tax benefits can often be tremendous, or losing tax benefits that may expire at year-end may be very expensive.  So, the buyer may have motives for doing so. 

There may be other reasons as well, such as deploying investment capital by year-end, shoring up the balance sheet ("window dressing") for year-end financial statements, etc. 

The Seller

Generally, the seller completing the 1031 Tax Exchange shouldn't care, but some of the same reasons my apply.  They may want to get the property off their balance sheets by year-end, may want to reduce the amount of outstanding debt before December 31st, etc., just to name a few of the more obvious reasons. 

When to Sell/Close

One or both parties may wish to close on the property for some of the reasons stated above, or other reasons, in which case, it certainly does make sense to sell and close on the property before December 31st. 

However, barring other benefits, detriments, or issues not mentioned here, there is no real benefit from a 1031 Exchange perspective to closing in 2009 or 2010, unless you are concerned that your 1031 Tax Exchange may fail (i.e. you are not able to acquire replacement property). 

A failed or incomplete 1031 Exchange is generally taxable in the year of sale or the year in which the taxpayer has the right to receive their 1031 Exchange proceeds from the Qualified Intermediary.  This is the one main issue that taxpayers should consider when selling relinquished property in order to answer the question when should they close because it may affect their income tax situation. 

As yourself the following questions:

• Will closing in 2009 versus 2010, or vice versa, potentially place myself in a higher income tax bracket because of the 1031 Tax Deferred Exchange?
• Will closing in 2009 trigger my 45 day and 180 day deadlines before I am ready to?
• Would closing in 2010 buy me more time to look for and identify suitable replacement properties to be acquired through my 1031 Exchange? 
• Will closing earlier or later help or hurt my borrowing position? 
• Will closing in 2009 hold up the filing of my income tax return if I have not completed the acquisition of my replacement property?

There are probably many more question like this that should be addressed, so you should always consult with your legal and tax advisors before proceeding with your 1031 Tax Deferred Exchange.