What if Your 1031 Exchange Fails?

Here is Your 1031 Exchange Alternative

that Defers Capital Gains Tax and Delivers Cash at Closing

A Monetized Installment Sale is a way of structuring the tax-deferred sale of a highly-appreciated asset, such as real estate, that can be a lower-risk alternative to a 1031 exchange because it does not involve IRS deadlines for replacement property.

 

A monetized installment sale also lets you exit with cash,

which you can reinvest in real estate or other asset types, tax-deferred.

The Monetized Installment Sale

A 1031 Exchange Alternative

Advantages of a Monetized Installment Sale
Compared to a 1031 Exchange

1. No exchange deadlines -- you can take your time finding replacement property, if that is your objective. This means you won't be "boxed in" as deadlines approach, and you will not be tempted to overpay for replacement property, just to preserve your 1031 exchange tax deferral.

2. No "like kind property requirements." You can use the proceeds from a monetized installment sale to invest in other real estate OR any other type of asset.

3. No "common ownership" requirement. You and your partners can go separate ways when selling, even if one wants to exchange into other real estate and you want a cash exit.

4. No "boot" issues.

35-minute deep dive

The 1031 tax deferred real estate exchange is an excellent vehicle for building real estate wealth, but it comes with some risks. When exchanges go as planned, real estate exchangers are happy. When a 1031 exchange fails to complete, no one is happy, except possibly the IRS, which will collect capital gains tax revenue from the would-be exchanger.

 

Fortunately, there is a 1031 exchange alternative – known as a Monetized Installment Sale – that can serve as an option, instead of taking the risk that your 1031 exchange fails.

What if Your 1031 Exchange Doesn't Close?

Regardless of the reason a tax-deferred exchange does not close, if your 1031 exchange doesn't work out, then instead of deferring capital gains tax, you must pay. This is an ever-present risk -- that your tax-deferred exchange fails to close, so you do not eliminate capital gains tax as you had planned.

The odds that a 1031 exchange will fail to close can be uncomfortably high, representing a risk to real estate sellers who wish to defer capital gains tax. While the percentage of exchanges that fail may not seem high, it’s worth noting that tight 1031 exchange deadlines often encourage exchangers to overpay for their replacement property, or exchange into less than desirable property – just to complete the exchange and defer the tax. For these reasons it’s worth considering a 1031 alternative that does not impose rigid deadlines.

Reduce Risks with a 1031 Exchange Alternative

Most would-be exchangers are unaware that they even had an option when a 1031 exchange is destined to fail. Exchanges usually fail due to the seller’s inability to find a suitable replacement property within the required 45-day identification period, or they are unable (or unwilling) to close on an identified property within the 180-day exchange period.

 

When a 1031 exchange falls through, it results in a taxable sale, and the seller ends up paying the capital gains tax when it could have been avoided by implementing a little-known, but highly effective, 1031 exchange alternative. Real estate owners can avoid the risk of a failed exchange and still defer their capital gains tax by using an alternative tax strategy.

The Monetized Installment Sale -

a 1031 Exchange Alternative

A Monetized Installment Sale is a way of structuring the tax-deferred sale of a highly-appreciated asset, such as real estate. It can be a valuable alternative whenever there are concerns that a tax-deferred like-kind real estate exchange may be too risky.

 

Defer Capital Gains Tax and Sell your Property for Cash at Closing

When you anticipate that a 1031 exchange may not be successful, it may be better to skip that option and instead undertake the sale of the property via a Monetized Installment Sale. This will have no impact on any of the counterparties to the transaction, but it will preserve your ability to defer capital gains tax. It also will leave you with cash equivalent to approximately 93.5% of your net sales proceeds. This is cash that you can then reinvest any way you wish, in other real estate, other other types of assets.

 

Even if your goal is to reinvest in other real estate, when a Monetized Installment Sale is used as a 1031 exchange alternative, you conclude your sale transaction by receiving cash at closing instead of a replacement property. Then you may to use the cash to shop for another property, if you wish, without any deadlines.

Contact Us to Explore Your 1031 Exchange Alternative

Please contact us if you want to explore eliminating 1031 exchange risks by utilizing a Monetized Installment Sale as a 1031 alternative. 

How to Defer Capital Gains Tax for 30 Years

and

Simultaneously Obtain Cash

Equal to 93.5% of Your Net Sales Proceeds

(2:20 video)

Learn More

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