Written by Patty Flowers. Patty Flowers is AVP for Investment Property Exchange Services (IPX1031®) and a Certified Exchange Specialist®. See her website.
If a delayed 1031 exchange began in the latter portion of 2012, the exchange period may run into 2013. If the exchange fails or if the taxpayer receives cash boot in 2013, the 1031 regulations treat the exchange as an installment sale allowing the taxpayer to consider that the exchange proceeds were received (and are taxable) in 2013.
However, given the fact that taxes will be increasing for many taxpayers in 2013 (Healthcare Tax of 3.8% plus a potential increase in the long term capital gain rate) a taxpayer may want to recognize the gain in 2012 (when the relinquished property sold) rather than in 2013 (when the exchange proceeds are received). There is a way to do this! In accordance with IRC section 453(d), a taxpayer may “elect out” of the installment method; thereby recognizing the gain in 2012 instead of 2013.
To elect out, the sale should be reported on Form 8949, Form 4797 (or both) and not on Form 6252. The election must be made by the due date, including extensions, for filing the 2012 tax return. For more information about the procedure and forms to use see IRS Publication 537 and consult with your tax advisor.
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