Failed 1031 exchange

[Son N.]

I'm thinking of doing a 1031 but the local market is seller's so things might not be easy buying something new that makes financial sense. I have no intention to invest out-of-area and willing to pay cap gain tax if there is no other option.

What happens if I cannot identify any suitable replacement property after 45 days? Do I get back the money on day 46 from QI? Or what happen if the replacement property cannot be closed within 180 days? Money back from QI on day 181? Who sends 1099-S?

Also for tax, if the 1031 exchange fails, will it be just like a regular investment property sales (like 1031 did not happen) or do I have to file certain forms (eg: 8824)?

Thanks

[Dave Foster]

@Son N., There is no penalty for attempting but not completing a 1031 exchange.  The statutory process requires that the entire time frame of a 1031 cannot exceed 180 days or the date of your next tax filing (every exchange can have 180 days because if you're in the middle of one you simply extend your return).  This means that if you cannot complete an exchange it will always happen before your next tax return.  So you report the income on your next return just the way you would have normally.  There are no additional forms to file.  The 8824 is only filed if you complete an exchange.  You receive a 1099 at sale and it is up to your accountant to reconcile it appropriately as a sale or non recognition transaction by the 8824.

The easiest place to end an exchange is at the end of day 45.  If you do not turn in a 45 day identification list your exchange dies on day 46 and you get your proceeds back.  If you have an identified potential list but fail to close in the 180 day period you get your proceeds back immediately after.

In a market like this there are no guarantees of course of finding the right replacement.  Your attitude about paying tax rather than buying the wrong replacement is right on the money.  However, a minimal fee of between $750 - $1000 buys you 45 days of shopping time.  And since it's a cost of sale it's also deductible so the risk to you is really $400 - $750 for another look at the deck.