IRS gives taxpayers relief for failed exchanges with bankrupt intermediary

IRS Revenue Procedure 2010-14 gives relief to taxpayers left “holding the bag” when exchange intermediaries defaulted on completing exchange transactions relating to a bankruptcy of the intermediary.

In a typical deferred exchange, the proceeds from the sale of property are deposited with a qualified intermediary, which later uses the funds to pay for a replacement property.

Recent bankrupt intermediaries include 1031 Tax Group and 16 affiliates owned by Edward Okun that owed more than $150 million of exchange funds and LandAmerica that owed more than $419 million of exchange funds.

According to the Revenue Procedure, taxpayers won’t have to report funds not yet received from the intermediary as taxable income until the funds are received. The transaction can be reported as an “installment sale”. The sales price and contract price can be reduced for amounts cancelled in bankruptcy if it is completed in the year of the sale.

Mortgages paid off using the sale proceeds for the sold property in excess of the tax basis (cost to determine tax gain or loss) will generally be reported as cash received in the year of sale.

“Many taxpayers will be relieved to learn they don’t have to pay income taxes based on the entire sales price,” says Michael Gray, CPA. “Taxpayers who have previously reported the income should file amended returns under the Revenue Procedure and get a refund.”

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Michael Gray, CPA

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