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Installment Sales Rules on Recognizing Income

Taxable Income Recognized From A 1031 Exchange Can Be Reported Under The Installment Sale Rules Of IRC §453

Taxpayers who use the delayed exchange safe harbors and meet the requirements of the regulations are entitled to report any gain recognized on the exchange under the installment sale method of tax accounting (See Reg. §1.1031(k)-1(j)(2)). However, the regulation applies only if the Exchange Property is eligible for like-kind exchange treatment and if the taxpayer had a bona fide intent to enter into a 1031 Exchange.

This means that if a taxpayer enters into a delayed exchange before the end of the year and cashes out or receives cash after the end of the year, the gain on the exchange will be reported like an installment sale subject to the rules of IRC §453. The sale of the Exchange Property will be reported in the year of sale like an installment sale. Cash received after the end of the year from the Qualified Intermediary is taxed in the following tax year.

Does this seem like a great method of deferring income from one tax year to the next by having a Qualified Intermediary hold the cash temporarily? The answer is NO unless there was a bona fide intent to enter into a 1031 Exchange at the time of entering into the exchange.

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