§1031 Like-Kind Exchange Straddling Two Tax Years

Technical topics regarding tax preparation.
#1
AlexCPA  
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Taxpayer looking to a complete a §1031 like-kind exchange sold a property on 10/5/2021 for $1,000,000 and identified and purchased one replacement property on 11/5/2021 for $800,000 (therefore resulting in boot received of $200,000). After the purchase of the replacement property but within the 45 day identification period, the taxpayer identified two additional replacement properties to be acquired in tax year 2022. The taxpayer used a qualified intermediary for all pertinent transactions.

My research shows that this series of events results in no income tax effect in tax year 2021 as the potential implications (ex. recognition of gain due to boot received if at least one of the identified properties is not purchased in tax year 2022 or deferral under §1031 if at least one of the identified properties is purchased) have been pushed into tax year 2022. Of course, "bona fide intent" issues may come into play and I will advise the client accordingly.

Am I missing something here? Does this series of events result in no income tax implications for tax year 2021?

Also, in terms of reporting, this series of events would need to be reported as an installment sale on Form 6252 for tax year 2021 and then Form 8824 for tax year 2022, correct?

Your help would be greatly appreciated! :D
Last edited by AlexCPA on 30-Nov-2021 10:54pm, edited 1 time in total.
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#2
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It's all reported in 2021.
If you don't complete the exchange started in 2021, the gain isn't deferred to 2022.
~Captcook
 

#3
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IRS says to file an extension for 2021, until details are resolved. If there ends up being boot in 2021 its treated as an installment sale.
 

#4
AlexCPA  
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CaptCook wrote:It's all reported in 2021.
If you don't complete the exchange started in 2021, the gain isn't deferred to 2022.


Thank you for your response. However, the example shown per 26 CFR § 1.1031(k)-1 seems to indicate that the gain may be deferred to the following tax year (emphasis mine):

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.


Am I misunderstanding the above-mentioned example?
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#5
AlexCPA  
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TaxMonkey wrote:IRS says to file an extension for 2021, until details are resolved. If there ends up being boot in 2021 its treated as an installment sale.


Thank you, TaxMonkey.

My research is indicating the following possibilities with respect to the above-mentioned series of events:

1. Taxpayer does not purchase either of the additional identified replacement properties in tax year 2022:

1. No income tax effect for tax year 2021;

2. Gain resulting from boot is recognized in tax year 2022;

3. Form 8824 to be filed for tax year 2022.


2. Taxpayer purchases at least one of the additional identified replacement properties in tax year 2022 (assuming that all of the proceeds from the sale of the relinquished property are used to purchase one or both replacement properties):

1. No gain recognized in tax year 2021;

2. Form 6252 to be filed for tax year 2021;

3. Forms 8824 and 6252 to be filed for tax year 2022.



Does that sound right? Am I missing anything?

Thanks again for your feedback! :D
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#6
AlexCPA  
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Any takers on Post #5 above? Your help would be greatly appreciated. :)
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#7
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It is my understanding that 8824 would be filed with return for year of initial exchange, may have to extend to know final result and 6252 is filed in year of "sale" and year of any collections of principal. I file for all years between year of sale and final payment, even if no principal payments received in some years to make sure the sale is not overlooked. Therefore my answers would be:

1.
1. Gain is realized in 2021, but could be deferred until 2022 by filing 6252
2. Gain would be recognized in 2022 unless opt out of installment method
3. 8824 would be filed with 2021 return, extend if necessary to be sure of final result and 6252 would be filed, but with no gain recognied.

2.
1. Yes, if installment method used
2. 6252 would be filed for 2021 and 2022.
3. 8824 would be filed with 2021 return, extend if necessary to be sure of final result plus 6252 in 2021 and 2022
CPA, Retired
 

#8
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There may be gain recognition in 2021 if there was a mortgage. The mortgage payoff would be considered an installment payment in 2021.

Under both scenarios, 8824 for the 2021 tax return. In scenario 1 6252 in 2021 and 2022, with the possibility of gain for both years.
 

#9
AlexCPA  
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Thank you so much for your help, lckent and TaxMonkey! I really appreciate it.

TaxMonkey wrote:There may be gain recognition in 2021 if there was a mortgage. The mortgage payoff would be considered an installment payment in 2021.


In trying to wrap my head around this, is this what you're referring to with regard to mortgage payoff?:

Relinquished Property (Sold in tax year 2021)

Real Property

Adjusted Basis 300,000.00

Mortgage 150,000.00

Replacement Property (Acquired in tax year 2021)

Real Property

FMV 800,000.00

Realized Gain Calculation

FMV 800,000.00
Mortgage 150,000.00
Adjusted Basis (300,000.00)
Gain Realized 650,000.00

Net Boot Received

Mortgage 150,000.00

Net Boot Received 150,000.00

Gain Recognized 150,000.00

You're saying that relief of the mortgage attached to the property relinquished by Taxpayer A results in gain in tax year 2021 because the first replacement property was acquired in tax year 2021, correct?

Thanks again!
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#10
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Yes, under your scenario #1 the taxpayer has $200k of boot, $150k received in 2021 and $50k received in 2022.
 

#11
AlexCPA  
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Much appreciated, TaxMonkey -- thanks again! Your feedback was extremely helpful! :D
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#12
WillG  
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Call me crazy but sometimes I read these forums on the weekends because they are so insightful, lol!

I am a bit confused at the notion of having to pay tax on the amount required to payoff the mortgage of the original property. I think the relief of a mortgage is only taxable if the taxpayer does not take out a different loan for the replacement property? Or am I misunderstanding the set of facts?
 

#13
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WillG wrote:Call me crazy but sometimes I read these forums on the weekends because they are so insightful, lol!

I am a bit confused at the notion of having to pay tax on the amount required to payoff the mortgage of the original property. I think the relief of a mortgage is only taxable if the taxpayer does not take out a different loan for the replacement property? Or am I misunderstanding the set of facts?


Not just a different loan, but the loan must equal or greater than the original loan.

For example say you exchange a property for $3M with a $2M mortgage, but the replacement property is only $2M with a $!M mortgage. The taxpayer would have debt relief boot, which would be taxable to the extent there is gain.
 

#14
WillG  
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Ah ok. Yes that makes total sense to me.

Thanks for always being so insightful @Taxmonkey
 


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