An exchange started near the end of a tax year will often run into the following tax year.  The regulations address how to handle incomplete exchanges and cash “boot” received by the taxpayer in the following year.

If you structured your exchange with a “bona fide intent” to complete the exchange, you may report the exchange as an installment sale in the tax year in which the first relinquished property was sold.  Under the installment sale reporting rules, the receipt of an indebtedness that is secured directly or indirectly by cash or a cash equivalent is treated as receipt of payment.  The regulations provide that exchange proceeds held by a qualified intermediary could fall into that category and as long as there is a bona fide intent to exchange, the taxpayer can report cash not reinvested in replacement property as an installment sale. [Reg. 1.1031(k)-1(j)(2); Temp Reg. 15a.453-1(b)(3)(i)]

Any cash “boot” received in the following tax year can be reported using the installment sale method.  Cash “boot” is any cash not reinvested in replacement property and paid directly to you from the qualified intermediary.  This would apply when replacement property is acquired but not all of the exchange proceeds are used or when no replacement property is acquired. 

Reporting the cash “boot” using the installment sale method would allow you to defer the gain until the following tax year when you actually receive the exchange proceeds from  First American Exchange Company.

The regulations do not address how to handle liability relief (the sale proceeds of your relinquished property used to pay off debt against the old property) and whether the gain is due in the year of the sale or in the following tax year provided you had the bona fide intent to complete the exchange.  Revenue Ruling 2003-56 related to a partnership whose exchange straddled two tax years and held that if the exchange straddles two taxable years of the partnership, the amount of the relinquished liability that exceeds the amount of the replacement liability is treated as money or other property received in the first taxable year of the partnership, since the excess is attributable to the transfer of the relinquished property.  This reasoning should also apply to other taxpayers.

As with any tax reporting issue, you should consult with your accountant or tax advisor to be sure that you report an incomplete or failed exchange in the best way to meet your investment objectives.

Fact sheet: The Worker, Homeownership and Business Assistance Act of 2009

 ·         Signed into law on Friday, November 6^th, 2009

·         Significantly expands first-time homebuyer credit that was enacted in February 2009

·         Expands qualifying period till June 30^th, 2010

·         Expanded to include current homeowners who wish to move up

For FIRST TIME home buyers:

·         Credit remains as high as $8,000

·         Cannot have owned a principal residence within last three years

·         Must sign sales contract by May 1^st, 2010 and acquire the property before June 30^th, 2010

For CURRENT home buyers:

·         New tax credit available up to $6,500

·         Must have lived in their home for five consecutive years over previous last eight years

·         Homes must be purchased between November 7^th, 2009 and June 30^th, 2010

Income limits

·         $125,000 for singles

·         $225,000 for married couples

·         Increased limits means nearly all first-time homebuyers are eligible for the credit

·         Approximately 70% of current homeowners qualify

Additional requirements

·         Only available on residences under $800,000

·         If used as primary residence for 3 or more years after purchase, no repayment required

·         Buyers can claim credit on 2009 tax return, even if purchased in 2010, with an amended return

This is a summary of the facts, for complete information go to www.federalhousingtaxcredit.com.