June 16, 2019

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Selling Investment Property and Taxes: 1031 Exchanges and End of Year Planning

Tax Straddling When Selling Investment Property

Between now and the end of the year, taxpayers can legally avoid paying tax for an entire year on sales of investment real estate.

How? Just start a 1031 like-kind exchange at the closing of your sale this year. Assuming a good faith qualified intent, if you don’t find replacement property that you like, or if you otherwise don’t purchase replacement property within the 1031 exchange time limits, then you have the option to be taxed in 2014 or 2015 without penalty. You get a 1 year tax deferral just for trying.

If you successfully find suitable replacement property, all the better – you get a complete tax deferral. If you don’t, you still get a prize for trying – legally pushing off taxation to a later year.

This so-called tax straddle is expressly permitted by the IRS. By combining the 1031 exchange and 453 installment reporting rules, taxpayers can treat the cash received from their 1031 exchange qualified intermediary in early 2015 as a payment in 2015 instead of 2014. Taxpayers essentially get the benefits of an installment sale without the risks of a buyer failing to pay the future installment price.

Taxpayers should speak with their tax advisors (like us), since tax straddling doesn’t apply to all sales and any gain attributable to debt and mortgage payoffs will still be taxed in 2014, the year of sale.

This post was written with contributions from David Lawrence.

© 2019 Odin, Feldman & Pittleman, P.C.


About this Author

John P. Dedon, Tax, Estate Planning, Attorney, Odin Feldman Pittleman, Law Firm

John Dedon is a tax lawyer with a talent for explaining the complexities of tax law in lay terms.  Working in the estate planning, asset protection and business areas for almost 30 years, John helps clients preserve assets and plan for the future with traditional planning tools, including Trusts (dynasty trusts, intentionally defective trusts, grantor retained annuity trusts), LLC and partnership entities, and cutting edge concepts such as cryonic preservation trusts.  John also works extensively in the charitable area, creating public and private charities, remainder and lead trusts...