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For those mildly familiar with a 1031 Exchange, it is generally well understood that in a typical exchange, the Exchanger sells the Relinquished Property to the Buyer with the assistance of a title or escrow company or some other settlement agent. Most know that Replacement Property must be identified within 45 days of the sale and acquired within 180 days (or less due to the filing date for the year’s tax return, unless extended). Parties also know that the use of a Qualified Intermediary is highly advisable to assure compliance with https://www.accruit.com/sites/default/files/Internal%20Revenue%20Servic… § 1031. However often Exchangers or their advisors are unsure how the flow of deeds takes place under a delayed exchange following the 1991 Treasury Regulations on the subject. 
Evolution of Deeding in a 1031 Exchange 
Property Prior to The Starker Case 
The Starker case ushered in the modern era of tax deferred exchanges in the early 1980s.  Prior to that time, it was thought that an exchange had to be simultaneous. As part of a single closing transaction, the Exchanger sold and conveyed the Relinquished Property to his Buyer, in lieu of cash payment, which resulted in the Buyer obtaining the Exchanger’s target property from its Seller and arranged for the Buyer to transfer said property as Replacement Property to the Exchanger. As a result, the Exchanger and the Buyer completed an exchange. The Starker case changed everything when the Court held that nothing in IRC §1031 required that the sale and purchase had to be simultaneous. It wasn’t until the legislative response in the Tax Act of 1984 that the 180-day exchange period was added to the Tax Code, prior it was open ended under the Starker ruling. 
Following The Starker Case Decision 
The period between the Starker decision and 1991, due to the ability to complete a transaction on a delayed basis, brought up a myriad of unanswered questions including how to handle deeding of properties when an exchange is delayed. The original Code Section from 1921, as amended, did not really contemplate non-simultaneous structures. Given the confusion, it was unclear how legal title had to flow where the exchange was on a delayed basis. The Starker case involved a five-year window for the Buyer to acquire and transfer Replacement Property back to Starker. In The Tax Reform Act of 1984, Congress amended Section 1031 to limit the time to receive Replacement Property from the Buyer to the current period of 180 days. 
Deeding in a 1031 Exchange Post 1991 Regulations 
By providing the Regulations, the drafters attempted to answer all the open questions and to provide some certainty around the necessary process of an Exchange, including how to deed the title. This entailed making sure that that an actual exchange was still taking place, not simply a sale followed by a purchase within a certain time period, as well as making the exchange process as seamless as possible. A significant part of this was introducing the concept of the Qualified Intermediary (QI), who could substitute for the Buyer as a party with whom the Exchanger could exchange properties. 
The primary purpose of a QI was to take the Buyer out of any necessary participation in the Exchanger’s exchange transaction. In other words, the Buyer did not have to acquire Replacement Property from a third-party seller and transfer it to the Exchanger. 
QI Taking Tax Ownership to Properties 
The Regulations set forth several ways for the QI to meet the obligation of exchanging with the Exchanger. The first one is: “An intermediary is treated as acquiring and transferring property if the intermediary acquires and transfers legal title to that property”. Compliance with this provision means the QI takes legal title by deed from the Exchanger and deeds the Relinquished Property to the Buyer and takes legal title by deed from the Seller and deeds the Replacement Property to the Exchanger.   
Assignment of Rights in Lieu of Deeding to the QI 
Under the Regulations, if the QI joins the seller as a named party under the Relinquished Property Contract, and similarly, joins the buyer as a named party under the Replacement Property Contract, that is all that is necessary. But a far easier alternative exists to make the necessary nexus between the Exchanger and QI. This option entails the Exchanger to assign the rights under the sale and purchase agreements to the QI and provide written notice to all parties to the agreements of the assignment. This is the option that is most commonly used. It does from time beg the question, when using the “assignment of rights” process does it require the QI to take title to the properties? 
The answer is No, it is not required; the Exchanger can issue a direct deed to the Buyer of the Relinquished Property and receive a direct deed from the Seller of the Replacement Property. The availability of a direct deed is inferred from the Regulations as well as explicitly referenced in several IRS Rulings. It is interesting to note that Like-Kind Exchanges section of IRS Publication 544 (2023), Sales and Other Disposition of Assets tracks the language of the Regulations generally but explicitly adds the parenthetical underlined below: 
An intermediary is treated as acquiring and transferring the property you give up if the intermediary (either on its own behalf or as the agent of any party to the transaction) enters into an agreement with a person other than you for the transfer of that property to that person and, pursuant to that agreement, that property is transferred to that person (that is, by direct deed from you). An intermediary is treated as acquiring and transferring replacement property if the intermediary (either on its own behalf or as the agent of any party to the transaction) enters  into an agreement with the owner of the replacement property for the transfer of  that property and, pursuant to that agreement, the replacement property is transferred to you (that is, by direct deed to you). 
The ability to maintain a valid 1031 Exchange while still being able to direct deed properties between the Buyers and Sellers of an exchange not only simplifies the exchange process but can also be helpful to avoid transfer taxes that can occur when title work is involved, as well as avoid potential liabilities attached to properties such as environmental issues. Should a QI, or other party, have to take direct deed to a property and absorb its liabilities, even just for a matter of time, that could cause friction in an Exchangers ability to acquire desired properties. 
An additional outcome of the Regulations and introduction of the QI was that the Regulations made it very clear that during the pendency of the exchange, the Exchanger could not be in actual or constructive receipt of the sale proceeds, also termed exchange funds. Contrary to public belief, the primary purpose of the QI was not to hold the funds during this period, rather the Regulations set forth five different alternatives to hold funds in an acceptable manner. None of them included reference to the QI holding them, but by practice this became the simplest and most common way to protect the funds, which holds true today.   
At one time, to effectuate an exchange the Exchanger and the Buyer had to trade deeds, even if the Buyer acquired the trade property via a deed from a third-party Seller. The Starker case opened a new door from simultaneous exchanges to delayed exchanges, resulting in the need for additional clarification which were addressed in 1991 by the Regulations. Although past practice and the Regulations both approved the passing of deeds between the parties, the Regulations also sanctioned direct deeding by utilizing a QI and the “assignment of rights” process which simplified a 1031 Exchange and provided protections for all parties involved. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.        
 

For those mildly familiar with a 1031 Exchange, it is generally well understood that in a typical exchange, the Exchanger sells the Relinquished Property to the Buyer with the assistance of a title or escrow company or some other settlement agent. Most know that Replacement Property must be identified within 45 days of the sale and acquired within 180 days (or less due to the filing date for the year’s tax return, unless extended). Parties also know that the use of a Qualified Intermediary is highly advisable to assure compliance with https://www.accruit.com/sites/default/files/Internal%20Revenue%20Servic… § 1031. However often Exchangers or their advisors are unsure how the flow of deeds takes place under a delayed exchange following the 1991 Treasury Regulations on the subject. 
Evolution of Deeding in a 1031 Exchange 
Property Prior to The Starker Case 
The Starker case ushered in the modern era of tax deferred exchanges in the early 1980s.  Prior to that time, it was thought that an exchange had to be simultaneous. As part of a single closing transaction, the Exchanger sold and conveyed the Relinquished Property to his Buyer, in lieu of cash payment, which resulted in the Buyer obtaining the Exchanger’s target property from its Seller and arranged for the Buyer to transfer said property as Replacement Property to the Exchanger. As a result, the Exchanger and the Buyer completed an exchange. The Starker case changed everything when the Court held that nothing in IRC §1031 required that the sale and purchase had to be simultaneous. It wasn’t until the legislative response in the Tax Act of 1984 that the 180-day exchange period was added to the Tax Code, prior it was open ended under the Starker ruling. 
Following The Starker Case Decision 
The period between the Starker decision and 1991, due to the ability to complete a transaction on a delayed basis, brought up a myriad of unanswered questions including how to handle deeding of properties when an exchange is delayed. The original Code Section from 1921, as amended, did not really contemplate non-simultaneous structures. Given the confusion, it was unclear how legal title had to flow where the exchange was on a delayed basis. The Starker case involved a five-year window for the Buyer to acquire and transfer Replacement Property back to Starker. In The Tax Reform Act of 1984, Congress amended Section 1031 to limit the time to receive Replacement Property from the Buyer to the current period of 180 days. 
Deeding in a 1031 Exchange Post 1991 Regulations 
By providing the Regulations, the drafters attempted to answer all the open questions and to provide some certainty around the necessary process of an Exchange, including how to deed the title. This entailed making sure that that an actual exchange was still taking place, not simply a sale followed by a purchase within a certain time period, as well as making the exchange process as seamless as possible. A significant part of this was introducing the concept of the Qualified Intermediary (QI), who could substitute for the Buyer as a party with whom the Exchanger could exchange properties. 
The primary purpose of a QI was to take the Buyer out of any necessary participation in the Exchanger’s exchange transaction. In other words, the Buyer did not have to acquire Replacement Property from a third-party seller and transfer it to the Exchanger. 
QI Taking Tax Ownership to Properties 
The Regulations set forth several ways for the QI to meet the obligation of exchanging with the Exchanger. The first one is: “An intermediary is treated as acquiring and transferring property if the intermediary acquires and transfers legal title to that property”. Compliance with this provision means the QI takes legal title by deed from the Exchanger and deeds the Relinquished Property to the Buyer and takes legal title by deed from the Seller and deeds the Replacement Property to the Exchanger.   
Assignment of Rights in Lieu of Deeding to the QI 
Under the Regulations, if the QI joins the seller as a named party under the Relinquished Property Contract, and similarly, joins the buyer as a named party under the Replacement Property Contract, that is all that is necessary. But a far easier alternative exists to make the necessary nexus between the Exchanger and QI. This option entails the Exchanger to assign the rights under the sale and purchase agreements to the QI and provide written notice to all parties to the agreements of the assignment. This is the option that is most commonly used. It does from time beg the question, when using the “assignment of rights” process does it require the QI to take title to the properties? 
The answer is No, it is not required; the Exchanger can issue a direct deed to the Buyer of the Relinquished Property and receive a direct deed from the Seller of the Replacement Property. The availability of a direct deed is inferred from the Regulations as well as explicitly referenced in several IRS Rulings. It is interesting to note that Like-Kind Exchanges section of IRS Publication 544 (2023), Sales and Other Disposition of Assets tracks the language of the Regulations generally but explicitly adds the parenthetical underlined below: 
An intermediary is treated as acquiring and transferring the property you give up if the intermediary (either on its own behalf or as the agent of any party to the transaction) enters into an agreement with a person other than you for the transfer of that property to that person and, pursuant to that agreement, that property is transferred to that person (that is, by direct deed from you). An intermediary is treated as acquiring and transferring replacement property if the intermediary (either on its own behalf or as the agent of any party to the transaction) enters  into an agreement with the owner of the replacement property for the transfer of  that property and, pursuant to that agreement, the replacement property is transferred to you (that is, by direct deed to you). 
The ability to maintain a valid 1031 Exchange while still being able to direct deed properties between the Buyers and Sellers of an exchange not only simplifies the exchange process but can also be helpful to avoid transfer taxes that can occur when title work is involved, as well as avoid potential liabilities attached to properties such as environmental issues. Should a QI, or other party, have to take direct deed to a property and absorb its liabilities, even just for a matter of time, that could cause friction in an Exchangers ability to acquire desired properties. 
An additional outcome of the Regulations and introduction of the QI was that the Regulations made it very clear that during the pendency of the exchange, the Exchanger could not be in actual or constructive receipt of the sale proceeds, also termed exchange funds. Contrary to public belief, the primary purpose of the QI was not to hold the funds during this period, rather the Regulations set forth five different alternatives to hold funds in an acceptable manner. None of them included reference to the QI holding them, but by practice this became the simplest and most common way to protect the funds, which holds true today.   
At one time, to effectuate an exchange the Exchanger and the Buyer had to trade deeds, even if the Buyer acquired the trade property via a deed from a third-party Seller. The Starker case opened a new door from simultaneous exchanges to delayed exchanges, resulting in the need for additional clarification which were addressed in 1991 by the Regulations. Although past practice and the Regulations both approved the passing of deeds between the parties, the Regulations also sanctioned direct deeding by utilizing a QI and the “assignment of rights” process which simplified a 1031 Exchange and provided protections for all parties involved. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.        
 

For those mildly familiar with a 1031 Exchange, it is generally well understood that in a typical exchange, the Exchanger sells the Relinquished Property to the Buyer with the assistance of a title or escrow company or some other settlement agent. Most know that Replacement Property must be identified within 45 days of the sale and acquired within 180 days (or less due to the filing date for the year’s tax return, unless extended). Parties also know that the use of a Qualified Intermediary is highly advisable to assure compliance with https://www.accruit.com/sites/default/files/Internal%20Revenue%20Servic… § 1031. However often Exchangers or their advisors are unsure how the flow of deeds takes place under a delayed exchange following the 1991 Treasury Regulations on the subject. 
Evolution of Deeding in a 1031 Exchange 
Property Prior to The Starker Case 
The Starker case ushered in the modern era of tax deferred exchanges in the early 1980s.  Prior to that time, it was thought that an exchange had to be simultaneous. As part of a single closing transaction, the Exchanger sold and conveyed the Relinquished Property to his Buyer, in lieu of cash payment, which resulted in the Buyer obtaining the Exchanger’s target property from its Seller and arranged for the Buyer to transfer said property as Replacement Property to the Exchanger. As a result, the Exchanger and the Buyer completed an exchange. The Starker case changed everything when the Court held that nothing in IRC §1031 required that the sale and purchase had to be simultaneous. It wasn’t until the legislative response in the Tax Act of 1984 that the 180-day exchange period was added to the Tax Code, prior it was open ended under the Starker ruling. 
Following The Starker Case Decision 
The period between the Starker decision and 1991, due to the ability to complete a transaction on a delayed basis, brought up a myriad of unanswered questions including how to handle deeding of properties when an exchange is delayed. The original Code Section from 1921, as amended, did not really contemplate non-simultaneous structures. Given the confusion, it was unclear how legal title had to flow where the exchange was on a delayed basis. The Starker case involved a five-year window for the Buyer to acquire and transfer Replacement Property back to Starker. In The Tax Reform Act of 1984, Congress amended Section 1031 to limit the time to receive Replacement Property from the Buyer to the current period of 180 days. 
Deeding in a 1031 Exchange Post 1991 Regulations 
By providing the Regulations, the drafters attempted to answer all the open questions and to provide some certainty around the necessary process of an Exchange, including how to deed the title. This entailed making sure that that an actual exchange was still taking place, not simply a sale followed by a purchase within a certain time period, as well as making the exchange process as seamless as possible. A significant part of this was introducing the concept of the Qualified Intermediary (QI), who could substitute for the Buyer as a party with whom the Exchanger could exchange properties. 
The primary purpose of a QI was to take the Buyer out of any necessary participation in the Exchanger’s exchange transaction. In other words, the Buyer did not have to acquire Replacement Property from a third-party seller and transfer it to the Exchanger. 
QI Taking Tax Ownership to Properties 
The Regulations set forth several ways for the QI to meet the obligation of exchanging with the Exchanger. The first one is: “An intermediary is treated as acquiring and transferring property if the intermediary acquires and transfers legal title to that property”. Compliance with this provision means the QI takes legal title by deed from the Exchanger and deeds the Relinquished Property to the Buyer and takes legal title by deed from the Seller and deeds the Replacement Property to the Exchanger.   
Assignment of Rights in Lieu of Deeding to the QI 
Under the Regulations, if the QI joins the seller as a named party under the Relinquished Property Contract, and similarly, joins the buyer as a named party under the Replacement Property Contract, that is all that is necessary. But a far easier alternative exists to make the necessary nexus between the Exchanger and QI. This option entails the Exchanger to assign the rights under the sale and purchase agreements to the QI and provide written notice to all parties to the agreements of the assignment. This is the option that is most commonly used. It does from time beg the question, when using the “assignment of rights” process does it require the QI to take title to the properties? 
The answer is No, it is not required; the Exchanger can issue a direct deed to the Buyer of the Relinquished Property and receive a direct deed from the Seller of the Replacement Property. The availability of a direct deed is inferred from the Regulations as well as explicitly referenced in several IRS Rulings. It is interesting to note that Like-Kind Exchanges section of IRS Publication 544 (2023), Sales and Other Disposition of Assets tracks the language of the Regulations generally but explicitly adds the parenthetical underlined below: 
An intermediary is treated as acquiring and transferring the property you give up if the intermediary (either on its own behalf or as the agent of any party to the transaction) enters into an agreement with a person other than you for the transfer of that property to that person and, pursuant to that agreement, that property is transferred to that person (that is, by direct deed from you). An intermediary is treated as acquiring and transferring replacement property if the intermediary (either on its own behalf or as the agent of any party to the transaction) enters  into an agreement with the owner of the replacement property for the transfer of  that property and, pursuant to that agreement, the replacement property is transferred to you (that is, by direct deed to you). 
The ability to maintain a valid 1031 Exchange while still being able to direct deed properties between the Buyers and Sellers of an exchange not only simplifies the exchange process but can also be helpful to avoid transfer taxes that can occur when title work is involved, as well as avoid potential liabilities attached to properties such as environmental issues. Should a QI, or other party, have to take direct deed to a property and absorb its liabilities, even just for a matter of time, that could cause friction in an Exchangers ability to acquire desired properties. 
An additional outcome of the Regulations and introduction of the QI was that the Regulations made it very clear that during the pendency of the exchange, the Exchanger could not be in actual or constructive receipt of the sale proceeds, also termed exchange funds. Contrary to public belief, the primary purpose of the QI was not to hold the funds during this period, rather the Regulations set forth five different alternatives to hold funds in an acceptable manner. None of them included reference to the QI holding them, but by practice this became the simplest and most common way to protect the funds, which holds true today.   
At one time, to effectuate an exchange the Exchanger and the Buyer had to trade deeds, even if the Buyer acquired the trade property via a deed from a third-party Seller. The Starker case opened a new door from simultaneous exchanges to delayed exchanges, resulting in the need for additional clarification which were addressed in 1991 by the Regulations. Although past practice and the Regulations both approved the passing of deeds between the parties, the Regulations also sanctioned direct deeding by utilizing a QI and the “assignment of rights” process which simplified a 1031 Exchange and provided protections for all parties involved. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.        
 

1031 Exchanges Across Tax Years 
IRC Section 1031 Regulations specify that, “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of tax imposed for the taxable year in which the transfer of the relinquished property occurs.” In other words, an Exchanger generally has 180 days to complete the 1031 Exchange by acquiring Replacement Property(ies), allowing them to defer taxes by reinvesting proceeds. 
However, if a 1031 Exchange begins in the second half of the year, specifically after July 5th, it may “straddle” two tax years, meaning the 180-day exchange deadline falls within the next calendar year. For a successful 1031 Exchange fully completed sooner, tax straddling has no impact on the exchange, it only comes into play if the 1031 Exchange continues to hold funds at the time of the https://www.accruit.com/blog/early-release-exchange-funds-possible-unde… possible distribution date under the regulations due to failure to acquire all identified Replacement Property by day 180 and having funds left in the exchange account. This same straddle can also result for exchanges that close on the Relinquished Property sale on or after November 17th. In most cases, an Exchanger cannot get the funds back prior to the expiration of the 45-day identification period, pushing the earliest funds return date until January 1st, or later, of the following year. This same result can occur if there are additional properties identified but not acquired and there are leftover funds in the exchange account. 
An additional consideration to be aware of for exchanges initiated after October 18th, Exchangers may not receive the full 180 days due to the April 15th tax deadline unless they https://www.accruit.com/blog/end-year-tax-considerations-2024″>file for a tax extension. To take full advantage of the 180-day period, they would need to submit Form 4868, which grants an additional six months to file income taxes. 
What Happens if a 1031 Exchange Fails? 
If a 1031 Exchange results, in whole or in part, with any of unused funds remaining, they are returned to the Exchanger, and all applicable taxes have to be paid on those funds. For a 1031 Exchange that starts and ends within the same year, 2024 for example, the Exchanger will be subject to pay the associated taxes as part of their 2024 Tax Return. In the event a 1031 Exchange spanned across two tax years, for example, it was started in 2023 and then resulted in a return of funds in 2024, the Exchanger has the option of which year they want to recognize the “gain” from the Relinquished Property sale (not depreciation recapture and certain other taxes). Default reporting provides that the gain from the sale is recognized in the year the exchange funds are received, rather than the year it was started. In this event, the Exchanger is able to defer the taxes until their 2024 tax filing deadline (April 15, 2025, for individual filings) by applying the IRS Installment Sale rules under Section 453. The reporting of the receipt of the (installment) payment is done via IRS Form 6252. This option provides flexibility, allowing Exchangers to manage tax obligations more effectively and take advantage of tax deferral short-term, even when the exchange results in the Exchanger’s receipt of any funds.  
For example, consider a 1031 Exchange initiated on December 1st, 2024. The 45-day identification deadline would fall on January 15, 2025, with the 180-day exchange period ending on May 30, 2025. If the exchange results in unused funds, whether due to non-identification or a lack of full Replacement Property acquisition, the Exchanger will not receive the exchange proceeds back until the subsequent tax year from the start of their exchange, in this example 2025. In this case, the IRS allows Exchangers to choose between reporting the gain in the year of the sale or in the year the proceeds were received through Section 453 installment sale rules. A special election needs to be made to report the gain in 2024 should the Exchanger desire the same. Using the installment sale treatment essentially provides a one-year deferral on payment of tax on the gains from the Relinquished Property. 
Another scenario is when an Exchanger acquires Replacement Property(ies) but does not fully utilize exchange funds, resulting in taxable “boot”. By structing the receipt of the boot as an installment sale, an Exchanger can spread the tax liability over time. Instead of paying taxes on the entirety of the boot in the year of the 1031 Exchange, an Exchanger can pay taxes only on the amount received each year under the installment sale. 
Common Scenarios Where a 1031 Exchange Fails and How Installment Sale Treatment Can Help 
Several scenarios can lead to the failure of a 1031 Exchange, but in some cases, installment sale treatment may provide an alternative tax-deferral strategy: 

Failure to Identify Replacement Property: The Exchanger may be unable to identify Replacement Property(ies) within the required 45-day period and the expiration of the identification period crosses into the following tax year 

Failure to Acquire Identified Properties: The Exchanger identifies Replacement Property(ies) within the 45-day period but does not acquire any by the 180-day deadline. 

Failure to Expend all the Exchange Funds:  Replacement Property has been acquired, but additional property has been identified, and excess funds still remain in the account, but the Exchanger does not wish to acquire any additional property. 

In all of these cases, opting for installment sale treatment can help reduce the immediate tax burden, provided the initial intent to complete a 1031 Exchange is maintained. 
Considerations for Determining Which Year to Report the Failed Exchange 
Some of the considerations for which tax year to report and pay the gain include:   
Reporting in Year of Returned Funds (latter year) 

The “time value of money”, i.e. all things being equal, most people would rather pay tax a year later and have those funds working for them without penalty for the year 

The Exchanger may believe that the capital gain rates might be lowered in the next tax year 

An Exchanger may have a change in income coming up, such as retiring or some other event, that might push him into a lower tax bracket in the following year 

Reporting in Year of Property Sale  

The Exchanger may have losses in the year of sale that she might be able to offset against the taxable gain. 

The Exchanger may believe that capital gain rates may be higher in future years and may want to pay the tax at the current rate rather than risk paying them later when I higher rate may be in effect. 

Understanding the Pros and Cons of Choosing Installment Sales 
Choosing the installment sale route carries no IRS penalties and adds flexibility, which is particularly beneficial when an exchange crosses into a new tax year and funds are returned in that year. The IRS considers installment sale treatment the default reporting method for an unsuccessful exchange that straddles tax years unless the Exchanger specifically elects to report the gain in the year of the Relinquished Property sale.  
However, an installment sale can have drawbacks, including:    

Debt paid off at the closing of the Relinquished Property, gain associated with the debt is typically recognized in the year of sale, leading to immediate tax liabilities.  

Depreciation recapture under Sections 1245 or 1250 is taxed as ordinary income, potentially resulting in a significant tax burden. If the sale price exceeds $150,000 and installment obligations exceed $5 million, interest is charged on the deferred taxes, raising the overall cost.  

It is important to note that the rules governing Section 453 installment sales are specific. Installment sales do not apply to all transactions, and they do not defer any gain related to debt relief. 
1031 Exchanges that span across two tax years require careful planning and consideration to ensure the Exchanger can fully benefit from IRS rules, including installment sales under Section 453. Installment sales offer a valuable benefit for deferring taxes should an exchange fail, or significant exchange proceeds remain unused. It is essential to consult with tax and/or legal advisors to fully understand to concepts covered in this blog.  
Consulting advisors to work in combination with a highly credentialed Qualified Intermediary such as Accruit can help Exchangers make informed choices and better manage tax their implications associated with the sale of real estate investments. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.        

1031 Exchanges Across Tax Years 
IRC Section 1031 Regulations specify that, “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of tax imposed for the taxable year in which the transfer of the relinquished property occurs.” In other words, an Exchanger generally has 180 days to complete the 1031 Exchange by acquiring Replacement Property(ies), allowing them to defer taxes by reinvesting proceeds. 
However, if a 1031 Exchange begins in the second half of the year, specifically after July 5th, it may “straddle” two tax years, meaning the 180-day exchange deadline falls within the next calendar year. For a successful 1031 Exchange fully completed sooner, tax straddling has no impact on the exchange, it only comes into play if the 1031 Exchange continues to hold funds at the time of the https://www.accruit.com/blog/early-release-exchange-funds-possible-unde… possible distribution date under the regulations due to failure to acquire all identified Replacement Property by day 180 and having funds left in the exchange account. This same straddle can also result for exchanges that close on the Relinquished Property sale on or after November 17th. In most cases, an Exchanger cannot get the funds back prior to the expiration of the 45-day identification period, pushing the earliest funds return date until January 1st, or later, of the following year. This same result can occur if there are additional properties identified but not acquired and there are leftover funds in the exchange account. 
An additional consideration to be aware of for exchanges initiated after October 18th, Exchangers may not receive the full 180 days due to the April 15th tax deadline unless they https://www.accruit.com/blog/end-year-tax-considerations-2024″>file for a tax extension. To take full advantage of the 180-day period, they would need to submit Form 4868, which grants an additional six months to file income taxes. 
What Happens if a 1031 Exchange Fails? 
If a 1031 Exchange results, in whole or in part, with any of unused funds remaining, they are returned to the Exchanger, and all applicable taxes have to be paid on those funds. For a 1031 Exchange that starts and ends within the same year, 2024 for example, the Exchanger will be subject to pay the associated taxes as part of their 2024 Tax Return. In the event a 1031 Exchange spanned across two tax years, for example, it was started in 2023 and then resulted in a return of funds in 2024, the Exchanger has the option of which year they want to recognize the “gain” from the Relinquished Property sale (not depreciation recapture and certain other taxes). Default reporting provides that the gain from the sale is recognized in the year the exchange funds are received, rather than the year it was started. In this event, the Exchanger is able to defer the taxes until their 2024 tax filing deadline (April 15, 2025, for individual filings) by applying the IRS Installment Sale rules under Section 453. The reporting of the receipt of the (installment) payment is done via IRS Form 6252. This option provides flexibility, allowing Exchangers to manage tax obligations more effectively and take advantage of tax deferral short-term, even when the exchange results in the Exchanger’s receipt of any funds.  
For example, consider a 1031 Exchange initiated on December 1st, 2024. The 45-day identification deadline would fall on January 15, 2025, with the 180-day exchange period ending on May 30, 2025. If the exchange results in unused funds, whether due to non-identification or a lack of full Replacement Property acquisition, the Exchanger will not receive the exchange proceeds back until the subsequent tax year from the start of their exchange, in this example 2025. In this case, the IRS allows Exchangers to choose between reporting the gain in the year of the sale or in the year the proceeds were received through Section 453 installment sale rules. A special election needs to be made to report the gain in 2024 should the Exchanger desire the same. Using the installment sale treatment essentially provides a one-year deferral on payment of tax on the gains from the Relinquished Property. 
Another scenario is when an Exchanger acquires Replacement Property(ies) but does not fully utilize exchange funds, resulting in taxable “boot”. By structing the receipt of the boot as an installment sale, an Exchanger can spread the tax liability over time. Instead of paying taxes on the entirety of the boot in the year of the 1031 Exchange, an Exchanger can pay taxes only on the amount received each year under the installment sale. 
Common Scenarios Where a 1031 Exchange Fails and How Installment Sale Treatment Can Help 
Several scenarios can lead to the failure of a 1031 Exchange, but in some cases, installment sale treatment may provide an alternative tax-deferral strategy: 

Failure to Identify Replacement Property: The Exchanger may be unable to identify Replacement Property(ies) within the required 45-day period and the expiration of the identification period crosses into the following tax year 

Failure to Acquire Identified Properties: The Exchanger identifies Replacement Property(ies) within the 45-day period but does not acquire any by the 180-day deadline. 

Failure to Expend all the Exchange Funds:  Replacement Property has been acquired, but additional property has been identified, and excess funds still remain in the account, but the Exchanger does not wish to acquire any additional property. 

In all of these cases, opting for installment sale treatment can help reduce the immediate tax burden, provided the initial intent to complete a 1031 Exchange is maintained. 
Considerations for Determining Which Year to Report the Failed Exchange 
Some of the considerations for which tax year to report and pay the gain include:   
Reporting in Year of Returned Funds (latter year) 

The “time value of money”, i.e. all things being equal, most people would rather pay tax a year later and have those funds working for them without penalty for the year 

The Exchanger may believe that the capital gain rates might be lowered in the next tax year 

An Exchanger may have a change in income coming up, such as retiring or some other event, that might push him into a lower tax bracket in the following year 

Reporting in Year of Property Sale  

The Exchanger may have losses in the year of sale that she might be able to offset against the taxable gain. 

The Exchanger may believe that capital gain rates may be higher in future years and may want to pay the tax at the current rate rather than risk paying them later when I higher rate may be in effect. 

Understanding the Pros and Cons of Choosing Installment Sales 
Choosing the installment sale route carries no IRS penalties and adds flexibility, which is particularly beneficial when an exchange crosses into a new tax year and funds are returned in that year. The IRS considers installment sale treatment the default reporting method for an unsuccessful exchange that straddles tax years unless the Exchanger specifically elects to report the gain in the year of the Relinquished Property sale.  
However, an installment sale can have drawbacks, including:    

Debt paid off at the closing of the Relinquished Property, gain associated with the debt is typically recognized in the year of sale, leading to immediate tax liabilities.  

Depreciation recapture under Sections 1245 or 1250 is taxed as ordinary income, potentially resulting in a significant tax burden. If the sale price exceeds $150,000 and installment obligations exceed $5 million, interest is charged on the deferred taxes, raising the overall cost.  

It is important to note that the rules governing Section 453 installment sales are specific. Installment sales do not apply to all transactions, and they do not defer any gain related to debt relief. 
1031 Exchanges that span across two tax years require careful planning and consideration to ensure the Exchanger can fully benefit from IRS rules, including installment sales under Section 453. Installment sales offer a valuable benefit for deferring taxes should an exchange fail, or significant exchange proceeds remain unused. It is essential to consult with tax and/or legal advisors to fully understand to concepts covered in this blog.  
Consulting advisors to work in combination with a highly credentialed Qualified Intermediary such as Accruit can help Exchangers make informed choices and better manage tax their implications associated with the sale of real estate investments. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.        

1031 Exchanges Across Tax Years 
IRC Section 1031 Regulations specify that, “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of tax imposed for the taxable year in which the transfer of the relinquished property occurs.” In other words, an Exchanger generally has 180 days to complete the 1031 Exchange by acquiring Replacement Property(ies), allowing them to defer taxes by reinvesting proceeds. 
However, if a 1031 Exchange begins in the second half of the year, specifically after July 5th, it may “straddle” two tax years, meaning the 180-day exchange deadline falls within the next calendar year. For a successful 1031 Exchange fully completed sooner, tax straddling has no impact on the exchange, it only comes into play if the 1031 Exchange continues to hold funds at the time of the https://www.accruit.com/blog/early-release-exchange-funds-possible-unde… possible distribution date under the regulations due to failure to acquire all identified Replacement Property by day 180 and having funds left in the exchange account. This same straddle can also result for exchanges that close on the Relinquished Property sale on or after November 17th. In most cases, an Exchanger cannot get the funds back prior to the expiration of the 45-day identification period, pushing the earliest funds return date until January 1st, or later, of the following year. This same result can occur if there are additional properties identified but not acquired and there are leftover funds in the exchange account. 
An additional consideration to be aware of for exchanges initiated after October 18th, Exchangers may not receive the full 180 days due to the April 15th tax deadline unless they https://www.accruit.com/blog/end-year-tax-considerations-2024″>file for a tax extension. To take full advantage of the 180-day period, they would need to submit Form 4868, which grants an additional six months to file income taxes. 
What Happens if a 1031 Exchange Fails? 
If a 1031 Exchange results, in whole or in part, with any of unused funds remaining, they are returned to the Exchanger, and all applicable taxes have to be paid on those funds. For a 1031 Exchange that starts and ends within the same year, 2024 for example, the Exchanger will be subject to pay the associated taxes as part of their 2024 Tax Return. In the event a 1031 Exchange spanned across two tax years, for example, it was started in 2023 and then resulted in a return of funds in 2024, the Exchanger has the option of which year they want to recognize the “gain” from the Relinquished Property sale (not depreciation recapture and certain other taxes). Default reporting provides that the gain from the sale is recognized in the year the exchange funds are received, rather than the year it was started. In this event, the Exchanger is able to defer the taxes until their 2024 tax filing deadline (April 15, 2025, for individual filings) by applying the IRS Installment Sale rules under Section 453. The reporting of the receipt of the (installment) payment is done via IRS Form 6252. This option provides flexibility, allowing Exchangers to manage tax obligations more effectively and take advantage of tax deferral short-term, even when the exchange results in the Exchanger’s receipt of any funds.  
For example, consider a 1031 Exchange initiated on December 1st, 2024. The 45-day identification deadline would fall on January 15, 2025, with the 180-day exchange period ending on May 30, 2025. If the exchange results in unused funds, whether due to non-identification or a lack of full Replacement Property acquisition, the Exchanger will not receive the exchange proceeds back until the subsequent tax year from the start of their exchange, in this example 2025. In this case, the IRS allows Exchangers to choose between reporting the gain in the year of the sale or in the year the proceeds were received through Section 453 installment sale rules. A special election needs to be made to report the gain in 2024 should the Exchanger desire the same. Using the installment sale treatment essentially provides a one-year deferral on payment of tax on the gains from the Relinquished Property. 
Another scenario is when an Exchanger acquires Replacement Property(ies) but does not fully utilize exchange funds, resulting in taxable “boot”. By structing the receipt of the boot as an installment sale, an Exchanger can spread the tax liability over time. Instead of paying taxes on the entirety of the boot in the year of the 1031 Exchange, an Exchanger can pay taxes only on the amount received each year under the installment sale. 
Common Scenarios Where a 1031 Exchange Fails and How Installment Sale Treatment Can Help 
Several scenarios can lead to the failure of a 1031 Exchange, but in some cases, installment sale treatment may provide an alternative tax-deferral strategy: 

Failure to Identify Replacement Property: The Exchanger may be unable to identify Replacement Property(ies) within the required 45-day period and the expiration of the identification period crosses into the following tax year 

Failure to Acquire Identified Properties: The Exchanger identifies Replacement Property(ies) within the 45-day period but does not acquire any by the 180-day deadline. 

Failure to Expend all the Exchange Funds:  Replacement Property has been acquired, but additional property has been identified, and excess funds still remain in the account, but the Exchanger does not wish to acquire any additional property. 

In all of these cases, opting for installment sale treatment can help reduce the immediate tax burden, provided the initial intent to complete a 1031 Exchange is maintained. 
Considerations for Determining Which Year to Report the Failed Exchange 
Some of the considerations for which tax year to report and pay the gain include:   
Reporting in Year of Returned Funds (latter year) 

The “time value of money”, i.e. all things being equal, most people would rather pay tax a year later and have those funds working for them without penalty for the year 

The Exchanger may believe that the capital gain rates might be lowered in the next tax year 

An Exchanger may have a change in income coming up, such as retiring or some other event, that might push him into a lower tax bracket in the following year 

Reporting in Year of Property Sale  

The Exchanger may have losses in the year of sale that she might be able to offset against the taxable gain. 

The Exchanger may believe that capital gain rates may be higher in future years and may want to pay the tax at the current rate rather than risk paying them later when I higher rate may be in effect. 

Understanding the Pros and Cons of Choosing Installment Sales 
Choosing the installment sale route carries no IRS penalties and adds flexibility, which is particularly beneficial when an exchange crosses into a new tax year and funds are returned in that year. The IRS considers installment sale treatment the default reporting method for an unsuccessful exchange that straddles tax years unless the Exchanger specifically elects to report the gain in the year of the Relinquished Property sale.  
However, an installment sale can have drawbacks, including:    

Debt paid off at the closing of the Relinquished Property, gain associated with the debt is typically recognized in the year of sale, leading to immediate tax liabilities.  

Depreciation recapture under Sections 1245 or 1250 is taxed as ordinary income, potentially resulting in a significant tax burden. If the sale price exceeds $150,000 and installment obligations exceed $5 million, interest is charged on the deferred taxes, raising the overall cost.  

It is important to note that the rules governing Section 453 installment sales are specific. Installment sales do not apply to all transactions, and they do not defer any gain related to debt relief. 
1031 Exchanges that span across two tax years require careful planning and consideration to ensure the Exchanger can fully benefit from IRS rules, including installment sales under Section 453. Installment sales offer a valuable benefit for deferring taxes should an exchange fail, or significant exchange proceeds remain unused. It is essential to consult with tax and/or legal advisors to fully understand to concepts covered in this blog.  
Consulting advisors to work in combination with a highly credentialed Qualified Intermediary such as Accruit can help Exchangers make informed choices and better manage tax their implications associated with the sale of real estate investments. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.