Tag: 1031 exchange

United States tax code sections 1031 and 1033 are sometimes confused by taxpayers as they are similar, not only in section number, but in that they were both created to provide for tax deferral of depreciation recapture and capital gains on the sale of property, but that’s where their similarity ends. 1031 exchange and 1033 exchange differ materially in:

Types of transactions they address
Type of property that can be acquired
Timeline requirements

Section 1033: Involuntary Conversion
Section 1033 of the tax code provides for the deferral of gain that is realized from an “involuntary conversion.” Such a conversion includes property that is destroyed in a casualty, property that is lost due to theft and property that is transferred as the result of condemnation or the threat of condemnation.
Section 1033: Direct and Indirect Conversions
With a conversion into replacement property in a 1033 exchange, any gain related to the involuntary conversion is deferred if the conversion involves property considered similar in related service or use. That is, the use of the replacement property must be substantially similar to that of the relinquished property. This is considered a direct conversion. With a condemned property, the replacement property must be considered like-kind, a standard similar to that of Section 1031.
A 1033 conversion may also be indirect – with gain triggered on the amount converted into cash or dissimilar property. Partial deferral of gain in an indirect conversion is elective, and the taxpayer must take certain steps and meet certain criteria in order to defer gain in an indirect conversion. Most importantly, the cost of the qualifying replacement property must be equal to or greater than the amount realized at conversion. Falling short of the replacement cost will trigger gain recognition to the extent of the underinvested portion. Acquisitions from related parties can also trigger gain recognition.
Section 1033: Timelines
Generally, replacement property in a 1033 conversion must be acquired within two years of the end of the tax year in which the gain was realized, though some conversions can result in three, four and five-year replacement periods.
1031 Like-Kind Exchanges
Unlike 1033, tax code Section 1031 is specific to the voluntary reinvestment of gain from the sale of investment or business use property. In the case of a 1031 exchange, any gain related to the disposition of property is deferred if the replacement property is considered similar in nature and character. The quality or grade of the replacement property is of no consequence in a 1031 like-kind exchange, only that the property is of the same nature, character, or class. In fact, most real estate is considered like-kind to other real estate.
Gain recognition is triggered in a 1031 like-kind exchange if the cost of replacement property is less than the amount of gain from property that is relinquished. Gain recognition would also be triggered in the event that the taxpayer receives property that is not like-kind to the relinquished property. Finally, as in the case of a 1033 conversion, acquisitions from related parties can trigger gain recognition. Learn more about this in “1031 Tax Deferred Exchanges between Related Parties.”
Section 1031: Timelines
In order to defer gain in a 1031 exchange, the taxpayer must acquire like-kind replacement property by the earlier of 180 calendar days or the due date of the taxpayer’s next income tax return.
Summary Tax Code Sections 1031 and 1033
Section 1031 and 1033 are both powerful tax deferral strategies, but they differ substantially in their usage. Section 1033 is tax deferral specific to the loss of property by a taxpayer and is therefore is referred to as an involuntary conversion. Section 1031 is the voluntary replacement of real property in an exchange of business or investment assets. Finally, while Section 1031 generally requires the use of a qualified intermediary, Section 1033 does not.

United States tax code sections 1031 and 1033 are sometimes confused by taxpayers as they are similar, not only in section number, but in that they were both created to provide for tax deferral of depreciation recapture and capital gains on the sale of property, but that’s where their similarity ends. 1031 exchange and 1033 exchange differ materially in:

Types of transactions they address
Type of property that can be acquired
Timeline requirements

Section 1033: Involuntary Conversion
Section 1033 of the tax code provides for the deferral of gain that is realized from an “involuntary conversion.” Such a conversion includes property that is destroyed in a casualty, property that is lost due to theft and property that is transferred as the result of condemnation or the threat of condemnation.
Section 1033: Direct and Indirect Conversions
With a conversion into replacement property in a 1033 exchange, any gain related to the involuntary conversion is deferred if the conversion involves property considered similar in related service or use. That is, the use of the replacement property must be substantially similar to that of the relinquished property. This is considered a direct conversion. With a condemned property, the replacement property must be considered like-kind, a standard similar to that of Section 1031.
A 1033 conversion may also be indirect – with gain triggered on the amount converted into cash or dissimilar property. Partial deferral of gain in an indirect conversion is elective, and the taxpayer must take certain steps and meet certain criteria in order to defer gain in an indirect conversion. Most importantly, the cost of the qualifying replacement property must be equal to or greater than the amount realized at conversion. Falling short of the replacement cost will trigger gain recognition to the extent of the underinvested portion. Acquisitions from related parties can also trigger gain recognition.
Section 1033: Timelines
Generally, replacement property in a 1033 conversion must be acquired within two years of the end of the tax year in which the gain was realized, though some conversions can result in three, four and five-year replacement periods.
1031 Like-Kind Exchanges
Unlike 1033, tax code Section 1031 is specific to the voluntary reinvestment of gain from the sale of investment or business use property. In the case of a 1031 exchange, any gain related to the disposition of property is deferred if the replacement property is considered similar in nature and character. The quality or grade of the replacement property is of no consequence in a 1031 like-kind exchange, only that the property is of the same nature, character, or class. In fact, most real estate is considered like-kind to other real estate.
Gain recognition is triggered in a 1031 like-kind exchange if the cost of replacement property is less than the amount of gain from property that is relinquished. Gain recognition would also be triggered in the event that the taxpayer receives property that is not like-kind to the relinquished property. Finally, as in the case of a 1033 conversion, acquisitions from related parties can trigger gain recognition. Learn more about this in “1031 Tax Deferred Exchanges between Related Parties.”
Section 1031: Timelines
In order to defer gain in a 1031 exchange, the taxpayer must acquire like-kind replacement property by the earlier of 180 calendar days or the due date of the taxpayer’s next income tax return.
Summary Tax Code Sections 1031 and 1033
Section 1031 and 1033 are both powerful tax deferral strategies, but they differ substantially in their usage. Section 1033 is tax deferral specific to the loss of property by a taxpayer and is therefore is referred to as an involuntary conversion. Section 1031 is the voluntary replacement of real property in an exchange of business or investment assets. Finally, while Section 1031 generally requires the use of a qualified intermediary, Section 1033 does not.

United States tax code sections 1031 and 1033 are sometimes confused by taxpayers as they are similar, not only in section number, but in that they were both created to provide for tax deferral of depreciation recapture and capital gains on the sale of property, but that’s where their similarity ends. 1031 exchange and 1033 exchange differ materially in:

Types of transactions they address
Type of property that can be acquired
Timeline requirements

Section 1033: Involuntary Conversion
Section 1033 of the tax code provides for the deferral of gain that is realized from an “involuntary conversion.” Such a conversion includes property that is destroyed in a casualty, property that is lost due to theft and property that is transferred as the result of condemnation or the threat of condemnation.
Section 1033: Direct and Indirect Conversions
With a conversion into replacement property in a 1033 exchange, any gain related to the involuntary conversion is deferred if the conversion involves property considered similar in related service or use. That is, the use of the replacement property must be substantially similar to that of the relinquished property. This is considered a direct conversion. With a condemned property, the replacement property must be considered like-kind, a standard similar to that of Section 1031.
A 1033 conversion may also be indirect – with gain triggered on the amount converted into cash or dissimilar property. Partial deferral of gain in an indirect conversion is elective, and the taxpayer must take certain steps and meet certain criteria in order to defer gain in an indirect conversion. Most importantly, the cost of the qualifying replacement property must be equal to or greater than the amount realized at conversion. Falling short of the replacement cost will trigger gain recognition to the extent of the underinvested portion. Acquisitions from related parties can also trigger gain recognition.
Section 1033: Timelines
Generally, replacement property in a 1033 conversion must be acquired within two years of the end of the tax year in which the gain was realized, though some conversions can result in three, four and five-year replacement periods.
1031 Like-Kind Exchanges
Unlike 1033, tax code Section 1031 is specific to the voluntary reinvestment of gain from the sale of investment or business use property. In the case of a 1031 exchange, any gain related to the disposition of property is deferred if the replacement property is considered similar in nature and character. The quality or grade of the replacement property is of no consequence in a 1031 like-kind exchange, only that the property is of the same nature, character, or class. In fact, most real estate is considered like-kind to other real estate.
Gain recognition is triggered in a 1031 like-kind exchange if the cost of replacement property is less than the amount of gain from property that is relinquished. Gain recognition would also be triggered in the event that the taxpayer receives property that is not like-kind to the relinquished property. Finally, as in the case of a 1033 conversion, acquisitions from related parties can trigger gain recognition. Learn more about this in “1031 Tax Deferred Exchanges between Related Parties.”
Section 1031: Timelines
In order to defer gain in a 1031 exchange, the taxpayer must acquire like-kind replacement property by the earlier of 180 calendar days or the due date of the taxpayer’s next income tax return.
Summary Tax Code Sections 1031 and 1033
Section 1031 and 1033 are both powerful tax deferral strategies, but they differ substantially in their usage. Section 1033 is tax deferral specific to the loss of property by a taxpayer and is therefore is referred to as an involuntary conversion. Section 1031 is the voluntary replacement of real property in an exchange of business or investment assets. Finally, while Section 1031 generally requires the use of a qualified intermediary, Section 1033 does not.

Taxable Boot Related to Prepaid Rent and Security Deposits
In a standard closing (not involving a 1031 exchange), it is typical for the prepaid rent and security deposits being held by the seller to be treated as a credit to the buyer at closing.  In that context, the net amount paid to the seller for the property at closing is simply reduced.  However, this same practice in connection with a sale of relinquished property in a 1031 exchange will inadvertently result in boot, and the amount of prepaid rent and security deposits retained the by taxpayer will be taxable.
This happens quite frequently in exchange transactions and the taxpayer and his advisors are unwittingly subjecting the taxpayer to taxable gain.  Rent and security deposits are income items and cannot be offset against gain otherwise recognized in an exchange.
Let’s Look at an Example
Take the case of a taxpayer selling a multi-family apartment building for $500,000.  Let’s assume he is holding $20,000 in rent he received representing the balance of days in the month where the buyer is actually in ownership of the property (prepaid rent).  Let’s also assume that the total of security deposits held by the taxpayer is $25,000.  So the taxpayer has a total of $45,000 of cash in his pocket.  Let’s also assume for the sake of simplicity that the property has no mortgage and nominal closing costs. 
If the taxpayer gives a credit to the buyer for this $45,000 amount, the net value received for the property would be $455,000.  However, this is problematic in a 1031 exchange as the $45,000 cannot be offset against gain and any boot will be taxable. To avoid taxable boot the taxpayer would have to buy replacement property equal to or greater than the net value, in this case $500,000, without the offset of the prepaid rent and security deposits.
How Is this Problem Corrected?
In a closing involving a 1031 exchange, preparers of settlement statements should ignore the customary practice of providing credits for rent and security deposits. Rather, the taxpayer should transfer those income items directly to the buyer.
Using the example above, with rent and security credits paid directly to the buyer, the net sale price of the apartment building would be $500,000 and if the taxpayer traded up or even for replacement property, there would be no boot.
Do Real Estate Taxes Credited to a Buyer Result in the Same Issue?
Real estate taxes are looked at a bit differently.  Generally at a closing, the seller will give the buyer a credit for taxes that have accrued while the seller was in ownership but which are not yet due and payable.  The payment of real estate taxes generally are billed and paid in arrears.  So the taxpayer has not received income on that sum, rather it is a liability of the property. 
The treatment of the real estate tax liability is similar to the way debt (mortgage) is treated.  Under exchange rules, any debt paid off upon the sale of a property must be replaced by new debt on the replacement property in an equal or greater amount.  “Relief” of real estate tax liability due to a credit of that amount to the buyer can be offset by equal or greater tax liability the taxpayer may receive from the seller of the replacement property.
Are These Same Considerations Relevant to the Replacement Property Closing?
Similar issues arise when there are credits to the taxpayer at closing.  Credit that the taxpayer receives for these items will be treated as taxable cash boot.  Again, a credit given to the taxpayer will reduce the amount that the taxpayer pays to buy the property, however a check directly from the seller to the taxpayer for these amounts avoids the result of taxable boot.  In the event a credit is given, the rent is treated as rental income.  The security deposit amount is not characterized as income since it is being held for return to the tenant upon conclusion of the lease.
Summary
It is customary for a seller to give the buyer a credit for the prepaid rent and the security deposits in a non-exchange sale of property. This causes no special issues.  In a closing involving a

Taxable Boot Related to Prepaid Rent and Security Deposits
In a standard closing (not involving a 1031 exchange), it is typical for the prepaid rent and security deposits being held by the seller to be treated as a credit to the buyer at closing.  In that context, the net amount paid to the seller for the property at closing is simply reduced.  However, this same practice in connection with a sale of relinquished property in a 1031 exchange will inadvertently result in boot, and the amount of prepaid rent and security deposits retained the by taxpayer will be taxable.
This happens quite frequently in exchange transactions and the taxpayer and his advisors are unwittingly subjecting the taxpayer to taxable gain.  Rent and security deposits are income items and cannot be offset against gain otherwise recognized in an exchange.
Let’s Look at an Example
Take the case of a taxpayer selling a multi-family apartment building for $500,000.  Let’s assume he is holding $20,000 in rent he received representing the balance of days in the month where the buyer is actually in ownership of the property (prepaid rent).  Let’s also assume that the total of security deposits held by the taxpayer is $25,000.  So the taxpayer has a total of $45,000 of cash in his pocket.  Let’s also assume for the sake of simplicity that the property has no mortgage and nominal closing costs. 
If the taxpayer gives a credit to the buyer for this $45,000 amount, the net value received for the property would be $455,000.  However, this is problematic in a 1031 exchange as the $45,000 cannot be offset against gain and any boot will be taxable. To avoid taxable boot the taxpayer would have to buy replacement property equal to or greater than the net value, in this case $500,000, without the offset of the prepaid rent and security deposits.
How Is this Problem Corrected?
In a closing involving a 1031 exchange, preparers of settlement statements should ignore the customary practice of providing credits for rent and security deposits. Rather, the taxpayer should transfer those income items directly to the buyer.
Using the example above, with rent and security credits paid directly to the buyer, the net sale price of the apartment building would be $500,000 and if the taxpayer traded up or even for replacement property, there would be no boot.
Do Real Estate Taxes Credited to a Buyer Result in the Same Issue?
Real estate taxes are looked at a bit differently.  Generally at a closing, the seller will give the buyer a credit for taxes that have accrued while the seller was in ownership but which are not yet due and payable.  The payment of real estate taxes generally are billed and paid in arrears.  So the taxpayer has not received income on that sum, rather it is a liability of the property. 
The treatment of the real estate tax liability is similar to the way debt (mortgage) is treated.  Under exchange rules, any debt paid off upon the sale of a property must be replaced by new debt on the replacement property in an equal or greater amount.  “Relief” of real estate tax liability due to a credit of that amount to the buyer can be offset by equal or greater tax liability the taxpayer may receive from the seller of the replacement property.
Are These Same Considerations Relevant to the Replacement Property Closing?
Similar issues arise when there are credits to the taxpayer at closing.  Credit that the taxpayer receives for these items will be treated as taxable cash boot.  Again, a credit given to the taxpayer will reduce the amount that the taxpayer pays to buy the property, however a check directly from the seller to the taxpayer for these amounts avoids the result of taxable boot.  In the event a credit is given, the rent is treated as rental income.  The security deposit amount is not characterized as income since it is being held for return to the tenant upon conclusion of the lease.
Summary
It is customary for a seller to give the buyer a credit for the prepaid rent and the security deposits in a non-exchange sale of property. This causes no special issues.  In a closing involving a

Taxable Boot Related to Prepaid Rent and Security Deposits
In a standard closing (not involving a 1031 exchange), it is typical for the prepaid rent and security deposits being held by the seller to be treated as a credit to the buyer at closing.  In that context, the net amount paid to the seller for the property at closing is simply reduced.  However, this same practice in connection with a sale of relinquished property in a 1031 exchange will inadvertently result in boot, and the amount of prepaid rent and security deposits retained the by taxpayer will be taxable.
This happens quite frequently in exchange transactions and the taxpayer and his advisors are unwittingly subjecting the taxpayer to taxable gain.  Rent and security deposits are income items and cannot be offset against gain otherwise recognized in an exchange.
Let’s Look at an Example
Take the case of a taxpayer selling a multi-family apartment building for $500,000.  Let’s assume he is holding $20,000 in rent he received representing the balance of days in the month where the buyer is actually in ownership of the property (prepaid rent).  Let’s also assume that the total of security deposits held by the taxpayer is $25,000.  So the taxpayer has a total of $45,000 of cash in his pocket.  Let’s also assume for the sake of simplicity that the property has no mortgage and nominal closing costs. 
If the taxpayer gives a credit to the buyer for this $45,000 amount, the net value received for the property would be $455,000.  However, this is problematic in a 1031 exchange as the $45,000 cannot be offset against gain and any boot will be taxable. To avoid taxable boot the taxpayer would have to buy replacement property equal to or greater than the net value, in this case $500,000, without the offset of the prepaid rent and security deposits.
How Is this Problem Corrected?
In a closing involving a 1031 exchange, preparers of settlement statements should ignore the customary practice of providing credits for rent and security deposits. Rather, the taxpayer should transfer those income items directly to the buyer.
Using the example above, with rent and security credits paid directly to the buyer, the net sale price of the apartment building would be $500,000 and if the taxpayer traded up or even for replacement property, there would be no boot.
Do Real Estate Taxes Credited to a Buyer Result in the Same Issue?
Real estate taxes are looked at a bit differently.  Generally at a closing, the seller will give the buyer a credit for taxes that have accrued while the seller was in ownership but which are not yet due and payable.  The payment of real estate taxes generally are billed and paid in arrears.  So the taxpayer has not received income on that sum, rather it is a liability of the property. 
The treatment of the real estate tax liability is similar to the way debt (mortgage) is treated.  Under exchange rules, any debt paid off upon the sale of a property must be replaced by new debt on the replacement property in an equal or greater amount.  “Relief” of real estate tax liability due to a credit of that amount to the buyer can be offset by equal or greater tax liability the taxpayer may receive from the seller of the replacement property.
Are These Same Considerations Relevant to the Replacement Property Closing?
Similar issues arise when there are credits to the taxpayer at closing.  Credit that the taxpayer receives for these items will be treated as taxable cash boot.  Again, a credit given to the taxpayer will reduce the amount that the taxpayer pays to buy the property, however a check directly from the seller to the taxpayer for these amounts avoids the result of taxable boot.  In the event a credit is given, the rent is treated as rental income.  The security deposit amount is not characterized as income since it is being held for return to the tenant upon conclusion of the lease.
Summary
It is customary for a seller to give the buyer a credit for the prepaid rent and the security deposits in a non-exchange sale of property. This causes no special issues.  In a closing involving a

Most users of Section 1031 understand the 180-calendar day deadline to complete their like-kind exchange.  This general understanding of the exchange period deadline is fine for most transactions, but many exchangers remain unaware of the more nuanced definition of this critical period.
What do the regulations say?
Section 1031’s underlying regulations state, “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 by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”
What do the regulations mean?
The regulations generally allow for 180 calendar days for taxpayers to complete their 1031 exchanges that straddle tax years, taxpayers may seek installment tax reporting on IRS Form 6252 in the year of the relinquished property sale.  For instance, if the relinquished property closed between November 16 and December 31, the 45-day identification would be in the following calendar year.  Similarly, if the relinquished property closed after July 5, and potential replacement property was identified within the 45-day identification period but no replacement property was actually acquired, the end of the exchange period would be in the following calendar year.  If the 1031 exchange fails by non-identification or by failure to purchase a replacement property, the sale proceeds would be returned to the exchanger in a different tax reporting year.  In this circumstance, the IRS allows taxpayers to either report the gain in the year of sale or in the year the proceeds were received under IRC 453 installment sale rules.  This would allow the taxpayer to select the year of reporting that is most beneficial.  One might say that a year’s worth of tax deferral is available regardless of the exchange having failed.
Taxpayers Beware
Installment sale treatment generally requires a bona fide intent to complete an exchange.  This means that the taxpayer had reason to believe, based on the facts and circumstances at the beginning of the exchange, that a like-kind replacement property would be acquired during the exchange period.
Other installment sale issues:

If there was debt paid off at closing of the relinquished property and gain associated with this debt, relief is generally recognized in the year of sale. 
Depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale.
Interest is charged on the tax deferred if the sale price of the relinquished property is over $150,000 and certain other instalment obligations exceed $5 million.

For taxpayers who have a taxable gain, there is one additional issue to consider.  If you are unsettled about current tax rates, you may extend your tax return to report by October 15.  This way, you can wait and see if the Congress will change the rates and select the year of reporting that is most beneficial for you.
Check with your tax advisor to determine the correct tax forms and tax extensions to utilize along with the selection of the reporting year for your exchange.

Most users of Section 1031 understand the 180-calendar day deadline to complete their like-kind exchange.  This general understanding of the exchange period deadline is fine for most transactions, but many exchangers remain unaware of the more nuanced definition of this critical period.
What do the regulations say?
Section 1031’s underlying regulations state, “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 by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”
What do the regulations mean?
The regulations generally allow for 180 calendar days for taxpayers to complete their 1031 exchanges that straddle tax years, taxpayers may seek installment tax reporting on IRS Form 6252 in the year of the relinquished property sale.  For instance, if the relinquished property closed between November 16 and December 31, the 45-day identification would be in the following calendar year.  Similarly, if the relinquished property closed after July 5, and potential replacement property was identified within the 45-day identification period but no replacement property was actually acquired, the end of the exchange period would be in the following calendar year.  If the 1031 exchange fails by non-identification or by failure to purchase a replacement property, the sale proceeds would be returned to the exchanger in a different tax reporting year.  In this circumstance, the IRS allows taxpayers to either report the gain in the year of sale or in the year the proceeds were received under IRC 453 installment sale rules.  This would allow the taxpayer to select the year of reporting that is most beneficial.  One might say that a year’s worth of tax deferral is available regardless of the exchange having failed.
Taxpayers Beware
Installment sale treatment generally requires a bona fide intent to complete an exchange.  This means that the taxpayer had reason to believe, based on the facts and circumstances at the beginning of the exchange, that a like-kind replacement property would be acquired during the exchange period.
Other installment sale issues:

If there was debt paid off at closing of the relinquished property and gain associated with this debt, relief is generally recognized in the year of sale. 
Depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale.
Interest is charged on the tax deferred if the sale price of the relinquished property is over $150,000 and certain other instalment obligations exceed $5 million.

For taxpayers who have a taxable gain, there is one additional issue to consider.  If you are unsettled about current tax rates, you may extend your tax return to report by October 15.  This way, you can wait and see if the Congress will change the rates and select the year of reporting that is most beneficial for you.
Check with your tax advisor to determine the correct tax forms and tax extensions to utilize along with the selection of the reporting year for your exchange.

Most users of Section 1031 understand the 180-calendar day deadline to complete their like-kind exchange.  This general understanding of the exchange period deadline is fine for most transactions, but many exchangers remain unaware of the more nuanced definition of this critical period.
What do the regulations say?
Section 1031’s underlying regulations state, “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 by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”
What do the regulations mean?
The regulations generally allow for 180 calendar days for taxpayers to complete their 1031 exchanges that straddle tax years, taxpayers may seek installment tax reporting on IRS Form 6252 in the year of the relinquished property sale.  For instance, if the relinquished property closed between November 16 and December 31, the 45-day identification would be in the following calendar year.  Similarly, if the relinquished property closed after July 5, and potential replacement property was identified within the 45-day identification period but no replacement property was actually acquired, the end of the exchange period would be in the following calendar year.  If the 1031 exchange fails by non-identification or by failure to purchase a replacement property, the sale proceeds would be returned to the exchanger in a different tax reporting year.  In this circumstance, the IRS allows taxpayers to either report the gain in the year of sale or in the year the proceeds were received under IRC 453 installment sale rules.  This would allow the taxpayer to select the year of reporting that is most beneficial.  One might say that a year’s worth of tax deferral is available regardless of the exchange having failed.
Taxpayers Beware
Installment sale treatment generally requires a bona fide intent to complete an exchange.  This means that the taxpayer had reason to believe, based on the facts and circumstances at the beginning of the exchange, that a like-kind replacement property would be acquired during the exchange period.
Other installment sale issues:

If there was debt paid off at closing of the relinquished property and gain associated with this debt, relief is generally recognized in the year of sale. 
Depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale.
Interest is charged on the tax deferred if the sale price of the relinquished property is over $150,000 and certain other instalment obligations exceed $5 million.

For taxpayers who have a taxable gain, there is one additional issue to consider.  If you are unsettled about current tax rates, you may extend your tax return to report by October 15.  This way, you can wait and see if the Congress will change the rates and select the year of reporting that is most beneficial for you.
Check with your tax advisor to determine the correct tax forms and tax extensions to utilize along with the selection of the reporting year for your exchange.

When selling or purchasing an investment property in a IRS 1031 exchange purposes are:

Real estate broker’s commissions, finder or referral fees
Owner’s title insurance premiums
Closing agent fees (title, escrow or attorney closing fees)
Attorney or tax advisor fees related to the sale or the purchase of the property
Recording and filing fees, documentary or transfer tax fees

Closing expenses which result in a taxable event are:

Pro-rated rents
Security deposits
Utility payments
Property taxes and insurance
Associations dues
Repairs and maintenance costs
Insurance premiums
Loan acquisition fees: points, appraisals, mortgage insurance, lenders title insurance, inspections and other loan processing fees and costs

To reduce the taxable consequences of these operating, financing and other closing fees, try to:

Pay security deposits, pro-rated rents and any repair or maintenance costs outside of closing, or deposit these amounts in escrow with the closing agent.
Treat accrued interest, prorated property tax payments or security deposits as non-recourse debt that the exchanger is relieved of on the sale of their old property, which could be offset against the debt assumed on the replacement property. Note: this would only work if mortgage debt is obtained on the replacement property purchase that exceeds the mortgage debt paid off on the sale of the relinquished property.
Match any prepaid taxes or association dues credited to the investor against the unallowable closing expenses listed on the settlement statement.

Check with your tax advisor prior to the closing to review the closing settlement statements to determine if there is an opportunity to