On a failed 1031 exchange, capital gains are paid in which year?

[Michelle R.]

We have a property sold end of December 2017. If we were to not procure a replacement property by the 180 day mark in June 2018, there would be capital gains owing. Would we pay the capital gains for tax year 2017 or for tax year 2018? Asking because the tax deadline for 2017 is next week and wondering if this can be put off til 2018. Thank you in advance for any help.

[Dave Foster]

@Michelle R.Your exchange must be complete by the time of your next tax filing.  Since you have not received proceeds at this point you can either abandon the exchange and treat the sale as an installment sale in 2017 with proceeds received in 2018 and tax due with your 2018 tax return.  Or you will file an extension for your 2017 return so that you can complete your exchange and then your accountant will file a form 8824 reporting the 1031 on the 2017 return.

Sometimes letting an exchange go isn't so bad when you're able to shift the date of the recognition of gain ahead one more year!