Discussion:Installment sale reporting of §1031 exchange
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Discussion Forum Index --> Advanced Tax Questions --> Installment sale reporting of §1031 exchange
Discussion Forum Index --> Tax Questions --> Installment sale reporting of §1031 exchange
| 3 November 2009 | |
| Assume that the relinquished property is sold late in the year for $200,000 and has a basis of $100,000 and a mortgage of $50,000. Taxpayer has the bona fide intent to complete the exchange but it fails and the QI returns the $150,000 the next year, having paid off the $50,000 mortgage in the prior year. Clearly, the realized gain is $100,000 and the gross profit percentage is 50%.
My question is, does the $50,000 mortgage payoff get treated as proceeds in the year of sale as the taxpayer benefits from the payoff of the mortgage under some application of the constructive receipt rules or other unforeseen rules? If so, then logically $25,000 ($50,000 x 50%) gain is recognized and then %75,000 ($150,000 x 50%) gain is recognized in the latter year when the $150,000 of escrow funds are released. Otherwise, I suppose I'd have to inflate the $150,000 actually received in order for the entire $100,000 gain to be properly reported in the latter year. I've done much research and asking around on this topic and haven't got anything remotely reassuring as to either treatment. Any and all examples I come across fail to include the impact of mortgages. Hello? Any guidance or assurance would be appreciated. Thanks! Lance | |
| 3 November 2009 | |
| The entire sale is taxable in the year the sale closed. The fact the funds were held by the QI is not relevant. No installment reporting. | |
| 3 November 2009 | |
| Installment reporting might be allowed. See if you can fit your facts into Example 3 at Treas. Reg. §1.1031(k)-1(j)(2)(vi). The example describes a taxpayer who enters into a deferred like-kind exchange with a qualified intermediary but who does not acquire any replacement property. The example states that the taxpayer may report the gain under the installment method. | |
| 3 November 2009 | |
| Agree with Dave, if the QI agreement contains the standard safe-harbor language which restricts the taxpayer's access to the cash, it is likely that installment reporting is available. | |
| 3 November 2009 | |
| Thanks to all that have posted replies. Here is 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. __________________________________________________ I'm clear on the availabilty of the installment sale treatment for the amout released by the QI, but if in this example, if the $100,000 relinquished property were subject to a $75,000 mortgage paid at the time of sale, wouldn't 75% ($75,000 mortgage/$100,000) be taxable in the year of sale and 25% ($25,000/$100,000) be taxable for the next yesr when QI returns the net proceeds? Thanks! | |
| 3 November 2009 | |
| Assuming you qualify under the Reg that DaveFogle referenced to report an installment sale:
Yes the amount of the mortgage paid in the year of sale is the amount received in year 1 of the installment sale to multiply times the profit percentage. Depreciation recapture all applies to year 1 as well. Year 2 would have the final amount of the installment sale when the balance of the proceeds are released. | |
| 3 November 2009 | |
| KathiJud,
While I tend to agree with your conclusion, I'm being hard pressed by my boss and the client for anything in the regs, court cases, rev rulings, etc. to support our conclusions. What are you basing your conclusion onif yoiu don't mind my asking? Lance | |
| 3 November 2009 | |
| For the amount of the mortgage paid off being sales proceeds in year 1? | |
| 3 November 2009 | |
| I believe you need to print IRC 453 and Reg. §1.1031(k)-1(j)(2)(vi). Then look where the regulation refers to IRC 453 for the installment sale rules.
Payment of an existing mortgage is always sales proceeds, so I would assume what you want to verify is the timing of that for taxation. Do your homework from the referenced materials and hopefully you will find your answer there. | |
