IRS Issues Guidance On Failed 1031 Exchanges When Qualified Intermediary Fails

There have been a number of failed 1031 Exchange Qualified Intermediaries over the last couple of years.  The majority of these were precipitated by the sever market conditions that we are experiencing, although some have been from misappropriation of clients' 1031 Exchange funds.

There are significant tax reporting challenges involved when an investor sells relinquished property and structures a 1031 Exchange in order to defer his or her taxes by acquiring a like-kind replacement property and then having the Qualified Intermediary fail. 

Revenue Procedure 2010-14 was issued today by the Internal Revenue Service to help investors that were affected by 1031 Exchange Qualified Intermediaries that failed to complete the investor's Like Kind Exchange by acquiring and transferring replacement property to the investor.

The Rev. Proc. 2010-14 provides a safe harbor method of treating and reporting capital gain or loss for certain taxpayers who initiate tax deferred exchanges under Section 1031 of the Internal Revenue Code but fail (default) to complete their 1031 Exchange because their Qualified Intermediary has failed to acquire and transfer like kind replacement property to the investor.

The Internal Revenue Service will not treat investors that meet the requirements of Rev. Proc. 2010-14 as being in actual or constructive receipt of their 1031 Exchange funds when the investor did not complete his or her 1031 Exchange because of their Qualified Intermediary (QI) defaults and becomes subject to a bankruptcy or receivership proceeding.

Comments

[Michael Federle]

What happens if the nominated exchange upleg property is destroyed or otherwise made undeliverable prior to close of escrow? our client is faced with a$1.4 Million capital gains tax in a straight sale and therefore needed to exchange.The building was built on the wrong parcel and now everyone involved is sueing eacjh other.The building will be scraped off and rebuilt on the right parcel.however,that time will exceed the trade window of 180 days wiping out the exchange.Any experience in a situation like this out there ? M federle 4154338840