March 5, 2010--San Diego, California--The Internal Revenue Service has issued guidance regarding the tax treatment to be used by taxpayers when they have experienced a failed 1031 Exchange transaction due to the collapse or failure of their Qualified Intermediary (QI).
"The guidance was issued in the form of IRS Revenue Procedure 2010-14. Rev. Proc. 2010-14 provided the much anticipated and much-needed guidance for taxpayers on how they should treat and report any gain or loss recognized due to a disqualified 1031 Exchange caused by the failure or collapse of their Qualified Intermediary," stated William L. Exeter, president and chief executive officer, Exeter 1031 Exchange Services, LLC.
The IRS is aware of the situations in which taxpayers initiate 1031 Exchanges by transferring relinquished property to a QI but were unable to complete their 1031 Exchanges within the required exchange period solely due to the failure or collapse of their QI to acquire and transfer replacement property to the taxpayer.
In many of these cases, the QI enters bankruptcy or receivership, thus preventing the taxpayer from obtaining immediate access to their 1031 Exchange proceeds from the sale of their relinquished property.
The IRS is of the view that a taxpayer who in good faith sought to complete the exchange using the QI, but who failed to do so because the QI defaulted on the exchange agreement and became subject to a bankruptcy or receivership proceeding, should not be required to recognize gain from the failed exchange until the taxable year in which the taxpayer receives a payment attributable to the relinquished property.
Affected parties are taxpayers who initiated a 1031 Exchange but were not able to complete the 1031 Exchange because their Qualified Intermediary defaulted and failed to complete the 1031 Exchange by acquiring and transfering like kind replacement property to the taxpayer. An affected taxpayer may report gain realized on the disposition of the relinquished property as the taxpayer receives payments attributable to the relinquished property.
"We are relieved to see the IRS issue this ruling and related guidance. The affected taxpayers now have substantive relief from the immediate income tax burden created by the failed 1031 Exchange due to the failure or default by their Qualified Intermediary," Mr. Exeter further stated.
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Exeter 1031 Exchange Services, LLC is a leading national provider of Qualified Intermediary, Exchange Accommodation Titleholding, and Advisory services for individual, corporate and institutional 1031 exchange clients.
Exeter administers all types of 1031 exchange transactions, including forward, reverse and improvement (build-to-suit or construction) 1031 exchange structures, in all 50 states. Exeter 1031 Exchange Services, LLC currently has national office locations in San Diego, Irvine, Ontario, Bakersfield, Fresno, and San Francisco, California and Kona, Hawaii, East Northport, New York, and Springfield, New Jersey.