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Estate and Elder Law

John Dedon On Estate Planning: 1031 Exchanges And End Of Year Planning

My partner, David Lawrence, is an expert on Section 1031 tax-free exchanges involving investment real estate. His thoughts regarding end of year planning and the advantages of 1031s is below.

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.

Please call us with any questions or if we can help you save taxes. David Lawrence, 703-218-2181, on behalf of the OF&P Tax Group.

Read more discussion of estate planning topics affecting Virginia residents and U.S. citizens at Dedon on Estate Planning.