1031 Exchange not reported

[DaveO]

Client had a 1031 exchange in process at end of 2004. They closed in 2005 within the 180 day period. They filed return thinking it would be reported in 2005. Can you amend a return to show the exchange. No boot was received.

[jainen]

There is no 180-day rule

There is no 180-day rule. There is a 180-day-or-due-date-of-return rule. If they filed their return before completing the exchange, they are not eligible for 1031 treatment and it can't be fixed. I hope you weren't their tax advisor at the time.

[Matt Sova]

Correct

Once again Jainen is correct. If the property sold on 12/29 and they filed the return on 2/10 and completed the exchange on 5/8 then they have to pay the tax on the gain.

[Unregistered]

1031

The 180-Day Rule for Receipt of Replacement Property. The replacement property must be received and Exchange completed no later than the earlier of 180 days after the transfer of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the exchanged property was transferred.

Should have file an extension.

[DaveO]

There is no 180-day rule. There is a 180-day-or-due-date-of-return rule. If they filed their return before completing the exchange, they are not eligible for 1031 treatment and it can't be fixed. I hope you weren't their tax advisor at the time.

I wasn't at the time.
I was just brought the problem after the fact. Thanks for the input. The fact that the rules don't state that it must be filed on an original return left me with some hope.

[jainen]

in their case

>>the rules don't state that it must be filed on an original return<<

It clearly says the exchange must be completed before filing the return. Usually we look at "substance over form" -- things like intent. Not with Section 1031. It must be structured and documented exactly right. That's why it's so important to use an experienced intermediary.

Your clients do have to amend 2004 to include the exchange, but it's a fully taxable exchange in their case.

[DaveO]

Thanks Jainen

The exchange was completed by the due date of the return. March of 2004. Client just believed that it would be reported in 2005. They had an exchange intermediary but they must not have explained the process fully. All the paper work is correct. There is no taxable boot. It just wasn't on the original return.

[jainen]

I misunderstood

I misunderstood. As long as they received the replacement property before they filed their return, they can amend 2004 to report it. There won't be any new tax or penalty due. Quite possibly the IRS will look closely at the event.