1031 exchange question - Posted by randyOH

Posted by randyOH on October 21, 2003 at 11:58:09:

You say:

“Point being if time lapses or you exceed the period for the exchange, the transaction/sale is a taxable event and the gain is recognized in the period it occured. Not necessarily in the period when you constructively received the money.”

This is not correct according to Treas Reg 1.1031(k)-1(j)(2). The reg says the installment sale rules apply to the situation. So you are taxed when you receive the money. Here is an example from the reg. Note, the sale occurred in 1994, but the gain was taxed in 1995.

Example 2. (i) D offers to purchase real property X but is unwilling to participate in a like-kind exchange. B thus enters into an exchange agreement with C whereby B retains C to facilitate an exchange with respect to real property X. On September 22, 1994, pursuant to the agreement, B transfers real property X to C who transfers it to D for $100,000 in cash. On that date B has a bona fide intent to enter into a deferred exchange. C is a qualified intermediary under paragraph (g)(4) of this section. The exchange agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the money held by C until the earlier of the date the replacement property is delivered to B or the end of the exchange period. On March 11, 1995, C acquires replacement property having a fair market value of $80,000 and delivers it, along with the remaining $20,000 from the transfer of real property X, to B.

(ii) Under section 1031(b), B recognizes gain to the extent of the $20,000 cash B receives in the exchange. Under paragraph (j)(2)(ii) of this section, any agency relationship between B and C is disregarded for purposes of section 453 and §15a.453-1(b)(3)(i) of this chapter in determining whether B is in receipt of payment. Accordingly, B is not treated as having received payment on September 22, 1994, on C’s receipt of payment from D for the relinquished property. Instead, B is treated as receiving payment on March 11, 1995, on receipt of the $20,000 in cash from C. Subject to the other requirements of sections 453 and 453A, B may report the $20,000 gain in 1995 under the installment method.

1031 exchange question - Posted by randyOH

Posted by randyOH on October 20, 2003 at 16:02:33:

I have set up an exchange with an intermediary. The money from my relinquished property went to the intermediary. I identified some properties, but did not buy any. So I will be receiving my money from the intermediary and will have to pay the taxes.

My question is if I get the money from the intermediary in January 04, will I be taxed in 04 even though the sale was in 03? I would also appreciate a citation to the controlling authority for your answer.

Thanks,
Randy

Re: 1031 exchange question - Posted by E.Eka

Posted by E.Eka on October 20, 2003 at 16:22:35:

The transaction occured in 2003, so it is in 2003’s tax year. The thing is, the only reason you didn’t have access to the money sooner was because you had a 1031 set up. If you had not set it up you would have had a taxable gain in this period.

Sorry… - Posted by randyOH

Posted by randyOH on October 21, 2003 at 19:17:30:

Please excuse that last message. I thought your post was new. I thought it was posted after the other messages below. Sorry, sorry, sorry.

Wrong - Posted by randyOH

Posted by randyOH on October 21, 2003 at 19:10:48:

If you don’t know what you are talking about, you should not try to answer the question. I cited the reg below. I even gave you an example from the reg. What is it you are disagreeing with?

Don’t just give me some dumb answer off the top of your head. We are talking about the tax law, not your personal opinion.

Citation please… - Posted by randyOH

Posted by randyOH on October 20, 2003 at 17:20:18:

Could you provide a citation for that answer?

After reading Treas Reg 1.1031(k)-1(f)(2) and (g), I come to the opposite conclusion. My interpretation of the regulation is that I am not in actual or constructive receipt of the money until I receive it from the intermediary.

So, if I receive it in 04, then I will be taxed in 04 even though the property was sold in 03.

Re: Citation please… - Posted by BILL TAYLOR

Posted by BILL TAYLOR on October 20, 2003 at 20:58:12:

Oh Well seems like a couple of problems here. If there were no properties identified then your time would be up. YOu only have 45 days to do so, in my opinion failure to identify any property would end the 1031 and the funds should have been distributed. When you recieve the distribution you owe you owe so off to work you go!

You need to read the question again. nt. - Posted by randyOH

Posted by randyOH on October 20, 2003 at 22:50:08:

nt

No citation needed - Posted by E.Eka

Posted by E.Eka on October 21, 2003 at 08:48:52:

Actually Randy, you may be right but you’re definitely wrong if there is a timing issue.
"…the taxpayer is in constructive receipt of the money or property at the time the limitations or restrictions expire, or are waived." Point being if time lapses or you exceed the period for the exchange, the transaction/sale is a taxable event and the gain is recognized in the period it occured. Not necessarily in the period when you constructively received the money.

If the exchange is done, then no taxable event occurs. However, if the exchange is not completed, a taxable event occurs and is treated AS IF the taxpayer never intended to do a 1031 exchange. If your 45 days expires in '03 then it’s taxable in '03. Of course that’s not in the tax regs or codes primarily because no one actually intended that to happen. The IRS wants to prohibited manipulation of gains/losses. (I asked an agent friend of mine here in Washington)

Besides, you should have you’re own accountant who is also a good tax planner.

That’s what I think. You can run it by your tax professional. If the gain is substantial the service (the IRS) might dispute it.