Introducing the Exchange Fall-Back Program
Solutions for a Failed §1031 Exchange,
Equity Boot, and Non-Exchangeable Investments
The core of this new solution for a failed §1031 exchange is a tax
deferral strategy based on structured sales under §453 for sellers of
investment real estate and business assets. It is a new twist on the
more traditional “installment sale”. A structured sale allows the seller
to take advantage of tax benefits and income security that were
not previously available. In a structured sale the seller is allowed to
spread the capital gain tax liability over a span of years. These payments
are similar to an annuity comprised of principal and interest,
and are guaranteed by a Fortune 50 insurance company.
FAILED EXCHANGE – The exchange fails because the
client does not identify or close on a replacement property
in the allotted time frame. The client does not want to incur
a capital gain tax liability. The §1031 Fall-Back strategy
gives the client another means to defer their tax liability.
EQUITY BOOT – Client falls short on exchanging into
property that is equal to or greater in value than the relinquished
property (Napkin rule). The client can use the remaining
funds (boot) by utilizing the §1031 Fall-Back for further
tax relief and a guaranteed income stream.
SALE OF BUSINESS / GOODWILL TAX CONSEQUENCE
– A structured sale can be utilized to offer the
client further tax deferral relief on the goodwill portion of
the business sale because goodwill does not qualify for a
CLIENT WANTS TO LEAVE THE REAL ESTATE
MARKET – A structured sale will provide an income
stream that may be attractive for clients who want to continue
to receive income and defer their tax liability, but no
longer want to hold real estate as an investment.
PERSONAL RESIDENCES – A structured sale may work
for the homeowner who sells their residence for a large gain.
Ex.: Homeowner sells residence for $2,000,000. Original
purchase price was $500,000. After the $500,000 exclusion
(for a married couple filing jointly), they are left with a
$1,000,000 gain. Instead of incurring a large capital gain tax
on the remaining $1,000,000, the homeowner elects to set
up a guaranteed stream of income by using a structured sale
for all or a portion of the $2,000,000 and only pay taxes as
they receive installment payments. This is also perfect for
supplementing retirement income.