1031 Tax Straddling for 2014

With the end of 2013 approaching, there are investors selling real estate who are not sure whether to initiate a 1031 Exchange because they are concerned about securing replacement property. One thing to keep in mind is that the IRS does not penalize investors for attempting to complete a 1031 Exchange. However, if investors cannot successfully complete their 1031 Exchange, the taxes associated with the sale of their investment property will be due. The good news is at this time of the year, there may be a silver lining. "Tax straddling" may be an option where the taxpayer receives a one year tax deferral.
How does it work? Once a 1031 Exchange is initiated, if replacement property is not purchased to complete the exchange, the earliest the Qualified Intermediary can return the taxpayer’s funds is on the 46th day (the day after the identification time period has ended) or, in some cases, the 181st day (the day when the 1031 Exchange time period is complete). Taxpayers who enter into a 1031 Exchange during the fourth quarter of 2013 and receive their funds back from the Qualified Intermediary in 2014 have the option of deferring payment of taxes on the profits from their sale until 2015 - the due date of their 2014 tax return. Combining §1031 with §453 permits the cash received from the Qualified Intermediary at end of the exchange to be treated as a payment in the year of actual receipt, rather than in the year the property was sold.
Tax straddling provides added incentive to taxpayers selling investment property at the end of the year. Why not attempt to complete a 1031 Exchange when a one year deferral is available as the back-up plan?
Taxpayers should consult with their tax advisors since tax straddling does not apply to all sales, and any gain attributed to debt relief will still have to be recognized in the year of sale. It is also important

that the taxpayer has the intent to complete the 1031 Exchange when the 1031 account is opened.
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Issues Affecting Real Estate

Rising interest and capitalization rates top the list of issues that have future implications for real estate.

Historically low interest rates have driven the economy and real estate markets in recent years, but as rates start to rise, it could raise capitalization rates, the ratio between the income produced by an asset and its cost, which could create anxiety about investing in real estate.

 Healthcare is also an important issue that has implications for real estate. As the population ages, there will be greater demand for senior housing, requiring a change in the configuration and size of available housing, and for greater medical care, resulting in an expansion in medical facilities.

 In commercial markets, transaction volume is up, credit is available, underwriting has loosened and a full range of debt options is back. For residential markets, underwriting remains tougher but rates are near historic lows and affordability remains high.

Future housing demand from echo boomers, the 80 million Americans born between 1982 and 1995, will also impact real estate markets. Echo boomers often prefer a more flexible and active urban lifestyle, and are often willing to trade home size for location. However, the suburbs are fighting back with new bike paths, and repurposed properties to attract more future buyers.

Then there is such factor as globalization, foreign investment and the economies of other countries as variables that will continue to have a greater impact on the U.S. economy and real estate market.

Impact of the Internet on bricks-and-mortar retail stores is also a growing issue. He said retail demand is down across the country due to an increase in Internet sales, which are expected to rise from the current 6.5 percent to nearly 15 percent by 2020.

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