Recently, we had a client who was in the final phases of their assessment of a potential 1031 Exchange when the following question emerged:
“If the taxpayer conducting the 1031 exchange delivers proceeds to the qualified intermediary from the sale through the escrow account, but then subsequently does not identify an alternative investment or simply decides to pay the tax and avoid a 1031 Exchange, would this essentially result in the same tax effect as if the taxpayer had taken proceeds in their name following the sale?”
This is a great question that brings to light a situation many taxpayers may find themselves in during the course of a 1031 exchange.
1031 Exchange Alternatives
If you do not identify any replacement property investments (or revoke any prior identifications), then the exchange period ends at midnight of the 45th day, and the qualified intermediary can return the unused exchange funds.
If you do identify replacement property investments and the 45th day elapses, then the 1031 funds are immediately available for the purchase of the designated properties/investments. However, if these funds are not used for replacement property purchases, they cannot be returned until the end of the exchange period which ends at midnight of the 180th day after the sale of the relinquished property.
In general, if the unused exchange funds are returned to the taxpayer, it’s the same tax bill if the exchange fails. But if the exchange is completed, then all of the gains may be deferred indefinitely.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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