When does a closing occur in a 1031 exchange

Given that all replacement property must be acquired within a maximum 180 calendar day period to complete a successful 1031 exchange, determining when a transaction has actually closed is critical to a successful transaction. There are many instances when a careful review of the facts and circumstances as well as state law may be necessary to determine when a transaction has closed and thus whether the closing occurred within the requisite 1031 exchange period. This need for review of such facts may arise where closing documents have been signed within the exchange period but the funds being transferred to the seller delayed until after the expiration of the exchange period. The question may also arise where the buyer has acquired possession of the property prior to the expiration of the exchange period and all prorations have occurred as of the date of possession but for some reason the deed is not recorded and/or delivered until after such time. A determination of when a closing occurs for tax purposes involves the consideration of several factors, including, but not limited to the date of transfer of title. White, Powell, 1970, TC Memo 1970-132, PH TCM, 70132, 29 CCH TCM 588. There is substantial authority for the fact that a sale may occur although title has not been transferred to the buyer where possession and the benefits and burdens of ownership of the property have been transferred to the buyer. Carrie, (1953) PH TCM ¶53366 , 12 CCH TCM 1315; Clodfelter, Floyd v. Com., (1970, CA9) 25 AFTR 2d 70-1254, 426 F2d 1391, 70-1 USTC 9413, affd 1967) 48 TC 694 . Whether a closing has occurred may require a determination of the party responsible for the risk of loss of the property, real estate and other taxes, utility bills and governmental assessments and the party with the right to the income from the property. The date on which prorations occur as indicated by a closing or settlement statement may substantiate the date on which the benefits and burdens of ownership have been transferred to the buyer. Although a closing may occur when title is transferred from a seller to a buyer, this is not always the case. A closing may occur when the buyer obtains possession of the property even though title has not transferred under certain circumstances. For tax purposes, a closing occurs when title is transferred from the seller to the buyer or the buyer obtains possession of the property and the buyer acquires the benefits and burdens of ownership. Thus, in many cases, it is critical to determine when the benefits and burdens of ownership are transferred to the buyer. It should be noted that when the purchase price is paid to the seller is not necessarily determinative. Even where the proceeds have been delivered, if the seller has no power to transfer title and neither title nor the benefits and burdens of ownership or possession of the property are transferred to the buyer, the mere payment of the purchase price will not result in a closing. Thornton, William, (1989) TC Memo 1989-214. For a discussion regarding rulings in this area, please see the continuation of this article appearing in next month's publication. Pamela Michaels is an attorney and a vice president of Asset Preservation, Inc., Manhattan, N.Y.