CAUTION: Receipt of Exchange Funds Can Kill your 1031
Exchange proceeds can be released from the exchange deposit account with written authorization signed by the Exchanger for expenditures related to the acquisition of identified replacement property. Typically this includes earnest money deposits. Exchange proceeds cannot be used to cover mortgage acquisition costs, such as points, application fees and processing fees. In order to have funds released for earnest monies, the Agreement of Sale for the replacement property MUST be assigned to 1031 CORP., as the Qualified Intermediary (QI). If you made an out-of-pocket deposit on the replacement property, it can be reimbursed from the exchange deposit account at the time of acquisition.
If no replacement property is identified within the 45-Day Identification Period, you do not have a valid exchange and the sale is a taxable event. All funds are released from the exchange deposit account on Day 46 (or the next business day). In no case can exchange funds be released and the exchange cancelled until the expiration of the 45-Day Identification Period.
If replacement property was identified and acquired but you have excess funds or you have elected not to acquire any of the identified replacement properties, the exchange funds MUST be held in the exchange deposit account until the expiration of the 180-Day Exchange Period. Reg. §1.1031(k)-1(g)(6), commonly referred to as the “g6 regs,” prevent the early release of funds outside of these time frames mentioned above.
Many often wonder why they cannot receive their funds back before these time periods expire especially when they have decided to not complete their exchange and realize the transaction will be taxable. It is a question 1031 CORP. has heard numerous times. The concern is that if 1031 CORP. released the funds outside these requirements, IRS could deem 1031 CORP. as an agent of the Exchanger and assert that we don’t follow the g6 regs and potentially taint not just this one transaction but every exchange we handled. Needless to say, 1031 CORP. cannot take that risk.
While it would be so much easier for us to simply release the funds and keep everyone happy, we know it is much more important to ensure the integrity of exchange transaction we facilitate. Your Exchange Officer is always available to review the time periods with you and discuss your situation in more detail should you decide not to complete your exchange transaction.