On this Free for All Friday, we are discussing when exchange funds can be released from a 1031 exchange account.
As the Qualified Intermediary (QI), 1031 CORP. often deals with Exchangers requesting funds be released from their exchange account for a variety of reasons. What most do not realize is that is not usually up the QI. Treasury Reg. § 1.1031(k)-1(g)(6), often referred to as the g6 regulations, provides three times during the exchange process when funds can be released from the exchange account.
- On Day 46 provided all identified replacement property has been acquired or in the event no replacement property was identified;
- At any point after Day 45 when all replacement property has been acquired and there are excess funds; or
- On Day 181.
If no replacement property is identified within the 45-Day Identification Period, there is no exchange and the sale is a taxable event. All funds are released from the exchange account on the first business day after Day 46. In no event can exchange funds be released and the exchange cancelled until the expiration of the 45-Day Identification Period.
If multiple replacement properties were identified and the desired property acquired but excess funds remain in the exchange account, the Exchanger can revoke all remaining identified properties before midnight of the 45th day. This will allow the excess funds to be released on Day 46.
If replacement property was identified and the Exchanger elects not to acquire one or all of the identified replacement properties, the exchange funds must be held in the exchange account until the expiration of the 180-Day Exchange Period.
The exchange funds cannot be released if the identified properties become unavailable. Under certain circumstances, it may be possible to release funds if a contingency stated in the Agreement of Sale cannot be met.
Exchange proceeds can also be released from the exchange account for expenditures related to the acquisition of identified replacement property, including earnest money deposits. These expenses are usually paid at the acquisition of the identified replacement property. Exchange proceeds cannot be used to cover mortgage acquisition costs, such as points, application 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 QI. If the Exchanger paid an out-of-pocket deposit on the replacement property, it can be reimbursed from the exchange account at the time of acquisition. Under no circumstances can exchange funds be released for an earnest money deposit or the acquisition of a property not identified.
1031 CORP. takes our responsibility to follow these regulations seriously. There are concerns that if QIs release the funds outside the g6 limitations, they expose all their exchange transactions to risk. Our Exchange Team understands that an Exchanger may not be happy with us when he wishes to terminate his exchange, receive the exchange funds and pay the respective taxes but 1031 CORP. must preserve the integrity of all of the successful exchange transactions we have facilitated during our 21 year history. We are committed to keeping the exchange process simple for our Exchangers and review when funds can be released when an exchange is initiated to ensure our Exchangers understand the regulations and know what to expect.
Contact one of Certified Exchange Specialists® any time with questions.
