USA Can you elect out of a 1031 exchange?


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I have a tax client who in 2021 executed a like kind exchange of rental properties. The like kind exchange was perfectly straight forward and well executed. They went through a 3rd party intermediary. There are no issues with the like kind exchange itself. However, the client ignored they had massive amounts of suspended passive losses. If they were to report the relinquished property of the 1031 exchange as a straight up sale, they can use all those prior year passive losses. The upshot is they actually would pay a lot less tax in 2021 if they reported it as a simple sale of property.

My question is, can you do that if a like kind exchange has already occurred? I don't see why you could not. I don't see any specific IRS rules saying you cannot. At first I was planning on just ignoring the like kind exchange as if it never happened. But there were objections in my office today that indeed you have to report a 1031 exchange once the exchange has been executed. I'm still doubtful of that, but now I'm wondering if perhaps one has to report the like kind exchange on the 8824 form but you can still elect to recognize the gain. But maybe your really are forced to defer the gain.

Any advice would be appreciated.
 
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