While this technique is not for everyone, rather than face the taxes due when an exchange fails, this may be an option that will provide tax relief. The disappointment of a failed exchange (one where the identification fails or the replacement property is undesirable) is exasperated by the tax consequences of having to pay the federal capital gains tax, recapture of previously taken depreciation and often, state capital gains or business profits tax. The strategy is to convert the cash sale into a promissory note payable over time thereby stretching the tax that would otherwise be immediately payable into a series of payments based on the note repayment stream. Using this methodology, the failed exchange will no longer be the worst result of a sale.
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