While it does slightly complicate things, there can be some benefits that come with straddling two tax years: First, according to the IRC 453 Installment Sale Rules – in the event of a failed or partial exchange where there is leftover exchange funds (cash boot), the taxpayer has an option of reporting the exchange in either: the year the sale recorded OR the year the taxpayer received any remaining or unused cash. This allows the taxpayer to delay tax consequences into the next tax year which could be useful. However, due to abuse, there are some stipulations that go along with that:
  1. Taxpayers must be able to prove a genuine attempt to complete the exchange.
  2. Depending on the amount of gain there could be interest due on the anticipated tax liability, so please consult with your tax professional.
  3. In the event that there was debt from the relinquished property that was not replaced (mortgage boot), that debt relief cannot be carried forward and must be recognized in the year of the sale.
Second, when a taxpayer identifies multiple replacement properties, any unused exchange funds must be held by the accommodator through the end of the exchange period. This means that funds are held for longer periods of time. Straddling tax years creates a unique loophole. The exchange period ends because one of the following: all identified properties were purchased by the taxpayer in the exchange, the 180th day has passed, or the taxpayer filed their tax return for the year for the sale of the relinquished property. That last option, is only possible when the taxpayer straddles two tax years, so in the event the exchangor is unable to complete their exchange, they can expedite the release of their unused exchange funds by filing their tax return and providing confirmation of that to their accommodator. Of course, there are also some burdens that come with those opportunities. The biggest concern with exchanges that straddle two tax years, is whether or not the taxpayer will be able to complete the exchange before they need to file their taxes. Filing one’s tax return ends the exchange period regardless of the taxpayer’s 180th day, so be sure to get any necessary filing extensions and work with your CPA to confirm that you can complete your exchange before filing deadlines.
The information contained herein is given as general information and informal strategy and should not to be construed as a legal opinion or tax advice. Each exchangor has the responsibility to seek legal and/or tax advice from their tax and legal advisors to ensure the tax benefits anticipated in the exchange.