This article digests the treatment of interest income on §1031 monies held by a facilitator in a deferred §1031 transaction.

Beginning October 8, 2008, the seller who is not to be paid a rate of interest on his §1031 monies will report and be taxed as receiving interest at a minimum imputed rate of interest on §1031 monies held by a facilitator (also called a §1031 trustee or qualified intermediary) in a deferred §1031 transaction.

In turn, the facilitator who holds §1031 monies without an agreement to pay the seller some rate of interest will in turn report as compensation for services rendered by the facilitator the amount of imputed interest the seller must report.

The monies subject to imputed interest when no interest is agreed to be paid to the seller include:

  • cash proceeds from the property in sold in a deferred §1031 transaction;
  • cash or cash equivalents securing an obligation to deliver replacement property;
  • below-market loans from the seller to §1031 transaction facilitators; or
  • properties sold in a delayed §1031 transaction.

Interest on §1031 monies held by a facilitator are not imputed if:

  • interest on the monies is earned by and credited to the seller, and the seller is responsible for reporting the interest [See first tuesday Forms 172-4 and 173-4]; or
  • the §1031 monies held for the seller by the facilitator:
    • do not exceed $2,000,000; and
    • the duration of the holding period is six months or less.

Monies held by a facilitator in a delayed §1031 transaction are treated as a loan from the seller to the facilitator unless interest is to be earned by the seller. The seller is now always responsible for reporting interest earnings on the §1031 monies. If he is not to be paid interest, the seller must impute and report interest at the 3-month T-Bill rate. [Click here for a chart of AFRs]

In turn, any actual interest earnings reported by the seller but received or retained by the facilitator, or imputed interest, are reportable by the facilitator as compensation received by the facilitator for services rendered, not interest income or profits.

Imputed interest accrues and is reported by the seller (and reported as a fee for services by the facilitator) in the year it accrues, if the delay in closing continues into the next calendar year.