Discussion:1031 Excange

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Discussion Forum Index --> Tax Questions --> 1031 Excange


Janakpatel (talk|edits) said:

11 January 2007
Here is my problem:

My client sold motel property in July of 2006. (S Corp) They took out almost 2 million dollars and kept rest for the exchange. The last date to complete the exchange was Jan. 8, 2007, but deal didn't work out. So they have to pay tax on it. Now all the shareholders got the money from middle guy in Jan 2007. How should I treat the 2006 taxes? and what is taxable gain in 2007?

DZCPA (talk|edits) said:

11 January 2007
All gets reported in 2006 since exchange never happened.

Janakpatel (talk|edits) said:

11 January 2007
DZCPA this is what I was thinking, tell me that is wrong.

From July 2006 to Dec 31,2006, money was held by intermediatory. SO do you think It's kind of an installment sale to intermediatory? and in 2007 it's sold from intermediatory to shareholders.

FTF65 (talk|edits) said:

January 11, 2007
Provided that the "middle guy" is a qualified intermediary, I believe that installment sale treatment is appropriate - see Reg. 1.1031(k)-1(j)(2)(vi) - Example 3

Janakpatel (talk|edits) said:

12 January 2007
FTF65 and DZCPA thank you for your input. Middle guy is QI.

My next question is, if I treat the installment sale in 2006, how I am going to balance my balance sheet in 2006? 2007 ending balances will be zero.

FTF65 (talk|edits) said:

January 12, 2007
As of the end of 2006, instead of recording the cash and a gain from the receipt of boot (which you didn't get), you record a note receivable and deferred gain. When you collect the cash in 2007, zero out the receivable and take the deferred gain to income. Simple example: assume that in 2006 you have land with tax basis of $100 and FMV of $200 that you want to exchange. Your tax-basis balance sheet has $100 of land and $100 of equity. You transfer the land to a QI who, in 2006, sells the land to a third party for $200. The exchange doesn't happen and now we are in 2007. As of the end of 2006, your balance sheet has $100 of equity and no assets. You record a $200 installment receivable from QI, and $100 of deferred gain (liability). Now you are in balance. In 2007, when the QI pays you the $200 cash, you record a debit to cash and credit the receivable. Simultaneously, debit the deferred gain and credit gain. Your balance sheet now has $200 of cash and $200 of equity. Liquidate.

TonyM (talk|edits) said:

12 January 2007
If the seller has the right to get the money before the 180 days lapsed the gain is reported in 2006. It needs to be in the contract with the QI that the QI will not release any money until a sale closes or the 180 days passes. Otherwise it is considered a constructive receipt.

Janakpatel (talk|edits) said:

13 January 2007
Thanks FTF65. Excellent example.

Dennis (talk|edits) said:

13 January 2007
Because the Example in our version of the Reg. is virtually unreadable:

Example 3.

(i) D offers to purchase real property X but is unwilling to participate in a like-kind exchange. B enters into an exchange agreement with C whereby B retains C as a qualified intermediary to facilitate an exchange with respect to real property X. On December 1, 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. The exchange agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash held by C until the earliest of the end of the identification period if B has not identified replacement property, the date the replacement property is delivered to B, or the end of the exchange period. Although B has a bona fide intent to enter into a deferred exchange at the beginning of the exchange period, B does not identify or acquire any replacement property. In 1995, at the end of the identification period, C delivers the entire $100,000 from the sale of real property X to B.
(ii) Under section 1001, B realizes gain to the extent of the amount realized ($100,000) over the adjusted basis in real property X ($60,000), or $40,000. Because B has a bona fide intent at the beginning of the exchange period to enter into a deferred exchange, paragraph (j)(2)(iv) of this section does not make paragraph (j)(2)(ii) of this section inapplicable even though B fails to acquire replacement property. Further, under paragraph (j)(2)(ii) of this section, C is a qualified intermediary even though C does not acquire and transfer replacement property to B. Thus, 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 December 1, 1994, on C's receipt of payment from D for the relinquished property. Instead, B is treated as receiving payment at the end of the identification period in 1995 on receipt of the $100,000 in cash from C. Subject to the other requirements of sections 453 and 453A, B may report the $40,000 gain in 1995 under the installment method.

FSteinCPA (talk|edits) said:

26 January 2007
http://www.1031exchangetax.com/

Great resource. hope it helps

PVVCPA (talk|edits) said:

28 January 2007
http://www.1031exchangetax.com/worksheet.htm

Another example of a 1031 exchange worksheet that improperly allows BOOT NETTING. You cannot net the constructive receipt of boot out on the sale of the relinquished property with boot added into the purchase of the replacement property.

FSteinCPA (talk|edits) said:

28 January 2007
I am not a 1031 expert nor do I pretend to know much about it other than the basics. Haven't had many clients utilize it previously. Are you saying that the worksheet on the site is incorrect? If it is, let me know and I will contact the owner of the site <friend of mine> and make sure it gets corrected.

thanks.

PVVCPA (talk|edits) said:

28 January 2007
Boot netting is a very common error in most worksheets I have seen. Refer to discussion at

Discussion:1031 Exchange "Net Boot" Question

FSteinCPA (talk|edits) said:

28 January 2007
thanks, i will pass this on to my friend and we'll see about correcting his web page.

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