It's Not Too Late For Year-End Tax Planning With 1031 Exchanges

Those of you who are familiar with 1031 Tax Exchanges and perhaps have completed a number of them yourselves are probably wondering what this blog is all about.  You are probably asking yourselves "how can you possibly use a 1031 Tax Deferred Exchange for any kind of tax planning at year-end?"  The answer is actually quite simple. 

Failed 1031 Tax Deferred Exchange

1031 Tax Deferred Exchanges are all about tax planning.  The 1031 Exchange allows a real estate investor to sell rental or investment property and defer the payment of his or her taxes by structuring a 1031 Tax Exchange and buying like-kind replacement property. 

Year-End Tax Planning for Failed 1031 Exchanges

But, there are special year-end tax planning opportunities that come into play when you have a 1031 Exchange in progress and it fails.  In other words, you are not able to complete your 1031 Tax Deferred Exchange because you did not identify any replacement properties or you were not able to acquire any of the properties that you did identify.

Investor's Right to Receive 1031 Exchange Funds

The issue at hand when a 1031 Tax Deferred Exchange fails is when exactly is the sale of the relinquished property taxable since the 1031 Exchange failed?  The answer depends on many factors, including, and especially, when the investor actually has the right to receive or control or receive the benefits to his or her 1031 Exchange proceeds held by the Qualified Intermediary. 

Capital gains will be recognized in the year in which the investor has the right to receive his or her 1031 Exchange funds provided the 1031 Tax Deferred Exchange transaction and related 1031 Exchange documents and agreements were structured properly.  This means that the capital gain might be recognized in the following year rather than the year of sale under the right circumstances.