Tax implications of failed 1031

[Avery Goodman]

I initiated a 1031 on October 18, 2017 (a flip I owned for 4 months), and now realize it may fail.  However, I've already filed a 2017 return.  Will the sale be recognized by the IRS as a short-term capital gain in 2017, or will it automatically be considered an installment sale because the 1031 won't officially fail until April 16, 2018?  Could I possible end up owing interest on top of the cap gain?

[Lauren Speidel]

@Avery Goodman If you have filed your 2017 return, you have stopped the ability to proceed with your 1031. Since the sale transaction took place in 2017 it is considered a 2017 transaction and therefore we recommend that taxpayers file an extension OR complete their 1031 exchange prior to April 15th.

If a property is held for one year or less, then sold for a gain, the short-term capital gain will be taxed at ordinary income tax rates. If an asset is held for more than one year, then sold for a gain, the long-term capital gain will be taxed at a maximum rate of 20%.

The proceeds you receive from the sale, when the QI releases your funds, will be treated as ordinary income for 2018.