Too Late for 1031 exchange?

Question

I just sold an investment property that I received through a foreclosure a few months prior.  We did a quick all-cash close and I didn't even consider the idea of doing a 1031 exchange for this property.  COE was a couple days ago and I have already received the funds into my bank account.

Question for the BP community:

- Is it too late to initiate a 1031 exchange even though COE has already happened?  My understanding is that you need to use a qualified intermediary before closing who will hold the 1031 funds in separate escrow account.

I held this property for less than a year and I'm really hoping to minimize the short term cap gains taxes (Fed+CA) that I will likely owe.  I will definitely do better tax planning next time.  Any suggestions would be appreciated!

Dave Foster · Answer

@Matthew Holland, Sorry but the Qualified intermediary must be involved prior to the closing of the sale. When you closed without two things happened - 1. There was no documentation to the 1031 on the settlement statement. And 2. you received receipt of the funds. Both of those disqualify your transaction from a 1031.

It's small consolation but remember no one ever went broke paying tax on profit.

Matthew Holland · Answer

Thanks @Dave Foster and @Steve MorrisAppreciate the insights

Steve Morris · Answer

Egads - You touched the money, as noted, too late.

Scott Wolf · Answer

@Matthew Holland as mentioned above it is too late for a 1031.

One thing that has been glazed over is if this is your business model moving forward.  If you buy at foreclosure and sell a few months later, you may not be able to 1031 anyway due to the short hold time, and intent to 'flip'.  Happy to discuss further if you'd like.

Bill Exeter · Answer

Hi @Matthew Holland,

It is too late.

The Purchase and Sale Agreement must be assigned to a Qualified Intermediary before the closing in order to avoid either constructive receipt or actual receipt.  Once the transaction has closed, you had constructive receipt of the funds because you had the right to the funds (even if the escrow officer did not disburse the funds).  In this case, you also received the funds so you had actual receipt of the funds.

You might want to speak with your tax advisor.  There are certain investments that produce tax credits that could offset your gain such as oil and gas programs, other energy programs, etc.  You might also look into a Qualified Opportunity Zone Investment Fund, which would allow you to defer the gain to 2026.

Too Late for 1031 exchange?

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