A 1031 is a great low risk method for deferring capital gains tax. But what happens if you can’t complete your 1031 exchange? Long story short; as soon as your 1031 falls through your sale becomes a taxable event to the IRS. An exchange can collapse for several reasons; failing to identify a replacement property during the 45-day period, failing to purchase a property off your 45-day list by the end of the 180-day period, and failing to complete the exchange before your next tax return. If you bought every property on your list and still have money left over, those funds become taxable to the IRS while the rest is sheltered in the exchange.
Sometimes life just happens and you can’t complete your 1031 exchange. You can’t find the right property, or the property you want falls through, or you’re handed one of those “uh-oh” moments. Fortunately, there is no penalty for starting a 1031 exchange and not completing it, other than paying the tax that would have normally been due. The 1031 exchange can be an inexpensive way to “kick the can down the road” to see what might be available. And while there are no repercussions for not completing a 1031, completing a successful exchange will help you maximize your real estate investing.
To learn more about how you can utilize the power of a 1031 Exchange visit The 1031 Investor.