Putting a 1031 Replacement Property under Contract

Posted by Margo McDonnell | Tue, Jan 15, 2013

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This Tuesday Tip looks at how the earnest money deposit for the replacement property in a 1031 tax-deferred exchange should be handled. If 1031 CORP. is holding the exchange funds, the deposit can be withdrawn from your exchange account provided the Agreement of Sale with the seller of the replacement property is assigned to 1031 CORP., as the Qualified Intermediary. The Assignment is often included when the Agreement of Sale is signed but if it is not, it can be signed by the Seller at any time in order to have the deposit paid from the exchange account. If for whatever reason, the Assignment cannot be signed by the Seller, 1031 CORP. can prepare a written notification of the assignment and have it delivered to the Seller. The notification will include a hold harmless clause assuring the Seller the 1031 exchange will not affect the Seller in any way or increase the Seller’s costs. 

The Assignment avoids any issues with constructive receipt of the exchange funds.

When completing a 1031 exchange, the 45-Day Identification and 180-Day Exchange Periods begin with the conveyance of the relinquished property to a buyer. The date the Agreement of Sale for the replacement property is signed does not matter but you do want to be sure to schedule the closing of the replacement property after the relinquished property is transferred to the Buyer. If the earnest money deposit was paid out of your pocket either for convenience or because the Agreement of Sale for the replacement property was signed before the relinquished property closed and the exchange funds were available, the deposit can be reimbursed from your exchange funds at the acquisition of the replacement property. A 1031 CORP. Exchange Officer will ask if you paid an out-of-pocket deposit and if so, do you want to have it reimbursed at your replacement property closing. The reimbursement cannot be paid directly to you.

As part of our security of funds policy, 1031 CORP. will also require your written authorization to release funds from your exchange account. Once we have your authorization along with a copy for the signed Agreement of Sale and the Assignment, 1031 CORP. will process the request as soon as possible.

Of course, your Exchange Officer is always available to answer questions and keep your exchange process simple.  Meet our Exchange Team.

  

Topics: 1031 exchange assignment; 1031 exchange rules

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