It is possible that a seller (intending to conduct a 1031 exchange, but failing to identify or properly receive replacement property) to be able to defer the income tax consequences from the failed 1031 exchange into the following income tax year. If the deferred exchange where the funds are held by a qualified intermediary fails, the seller should still be entitled to installment sales treatment when the proceeds or nonlike-kind property are received. This can be much better than recognition of the gain in the income tax year in which the relinquished property is closed.
Internal Revenue Code
The provisions of IRC §453 specifically contemplate that the installment sale rules and the like-kind exchange rules of IRC §1031 may apply to the same transaction.
- 453(f)(6) provides that in the case of an exchange which only partly satisfies the nonrecognition of gain rules under §1031 because of the receipt of boot, the taxpayer’s ability to use installment sale treatment with respect to the boot is determined by excluding from the installment sale computations
- any qualifying like-kind property received by the taxpayer and
- the gain not recognized as a result of such like-kind property.
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