Alice reinvests the sale proceeds in qualified replacement property
, which includes stock in other U.S.
A successful search for a qualified replacement property
necessitates careful considerations beyond whether the received property is qualified as boot.
1042 by purchasing qualified replacement property
. The gain is deferred until the newly purchased, potentially diversified portfolio is sold.
Under current law, Section 1042 allows an individual owner of stock in a nonpublicly traded C corporation that sponsors an ESOP to elect to defer the recognition of gain from the sale of such stock to the ESOP if the seller reinvests the sales proceeds into "qualified replacement property
," such as stock or other securities issued by a U.S.
A district court recently found that a taxpayer was unable to defer the gain realized upon a stock sale when the taxpayer purchased qualified replacement property
("QRP"), financing that purchase with a loan, but then transferred the loan to a third party (along with the QRP as collateral) in exchange for a cash loan from the third party.
To take advantage of this option, the proceeds must be reinvested in qualified replacement property
(stocks or bonds of domestic operating companies), creating an opportunity for financial professionals.
Specifically, gain is not recognized on the sale of qualified securities to an ESOP if the proceeds from the sale are reinvested in qualified replacement property
However, if such a sale is instead made to the corporation's employee stock ownership plan (ESOP), diversification can be achieved with a concomitant deferral of any capital gain so long as the sale proceeds are reinvested in "qualified replacement property
" (generally, securities traded on an established secondary market).
To benefit from the tax-delaying effect of [section] 1033, an owner must make a timely election of nonrecognition treatment of the gain and make a timely purchase of qualified replacement property
. A property owner may "elect" to defer the recognition of a gain under [section] 1033 simply by not reporting the gain on the tax return.
To defer the gain and tax liability, the selling shareholder must file the appropriate elections with the IRS and purchase "qualified replacement property
," such as securities issued by domestic operating companies, within 12 months of the sale to the ESOP or KSOP.
In placing these time limits on the acquisition of qualified replacement property
, Congress was placing section 1031 on a consistent course with other nonrecognition provisions of the Code, e.g., sections 1033(a) and 1034(a), that generally allow a two-year period in which taxpayers may find suitable replacement property for principal residences or property condemned or destroyed.
In other words, if the realized gain on receipt of $100 insurance proceeds is $30 and the actual or anticipated cost of qualified replacement property
is only $80, the taxpayer should report a $20 gain.