You may be unsure whether or not to sell your property using a 1031 exchange due to concerns about your ability to locate or complete the purchase of a suitable replacement property within the allowed time deadlines. Perhaps, in this case, the benefits of tax straddling will provide you with the silver lining that you seek.
The tax straddling concept allows a 1031 seller (“taxpayer”) to defer paying the capital gains tax on an exchange that is never completed (fails), where the sale and identification period were completed in 2015, but the purchase of the identified property in 2016 never occurs. For example, a calendar year taxpayer sells property on October 31, 2015 and with a bona fide intent to undertake a 1031 like-kind exchange, identifies one replacement property before the identification period expires on December 15, 2015. Subsequently, in 2016, the taxpayer is unable to purchase the identified property. Even though the taxpayer is unable to purchase the identified property, the Qualified Intermediary (QI) will not return the taxpayer’s funds until the conclusion of the 180 day exchange period in 2016.
Since the taxpayer has 180 days to complete the exchange and the 180th day falls in the 2016 calendar year, in these circumstances, the gain on the sale of the taxpayer’s property may be deferred until 2016, the year in which the exchange fails. Since the seller does not receive the return of his funds from the QI until 2016, the recognition of gain on the sale is triggered in 2016, rather than 2015, in effect, achieving installment sale treatment for the sale.
What is a 1031 exchange? Find out more by downloading our 1031 Exchange Kit.
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