Patricia Flowers, Investment Property Exchange Services

Everything seems to be moving at a faster pace as we quickly approach year-end. Lenders are trying to get buyers approved to close and sellers are trying to get properties sold and off their books so they can all start anew in 2016. Proper planning takes a back burner to this haste, and investors selling real estate are often unsure of what to buy next as replacement income property.

The good news is taxpayers selling as part of an IRC Section 1031 Exchange can buy time to determine their next real estate purchase, without IRS penalty, in a strategy referred to as “tax straddling.” Once an Exchange is initiated, the earliest the Qualified Intermediary (QI) can return the taxpayer’s funds is on the 46th day (if no property identified) or, in some cases, the 181st day (if identified property is not purchased).

Taxpayers who enter into a 1031 Exchange in the fourth quarter of 2015 and receive their funds back from the QI in 2016 have the option of deferring payment of taxes on those funds until 2017 - the due date of their 2016 tax return. This installment treatment permits the cash received from the QI at the end of the exchange to be treated as a payment in the year of actual receipt, rather than in the year the property was sold. Note any gain attributed to debt relief will still have to be recognized in the year of sale.

Tax straddling provides added incentive to taxpayers selling investment property at the end of the year. Since the IRS does not penalize investors for attempting to complete a 1031 Exchange, why not aim for the profits of a new replacement property purchase and the huge tax savings an Exchange can provide when a one year deferral is available as the back-up plan?

Taxpayers should always consult with their Qualified Intermediary and their tax advisor, since tax straddling does not apply to all sales.

Patricia Flowers is vice president for Investment Property Exchange Services, Inc. (IPX1031), Boston.