Although 1031 Exchange investors have the flexibility to take up to 45 calendar days to identify replacement properties and up to 180 calendar days to complete a purchase, it is important for investors to understand restrictions that there are imposed on their ability to access funds held in an exchange account. US Treasury Regulation, Section 1.1031(k)-1(g)(6), (often referred to as the “g6 regulations”) limits the ability of the qualified intermediary to release 1031 funds back to the investor to only the following three scenarios:SCENARIO #1: After 45 days from the closing date if a) all identified replacement property has been acquired or b) if no replacement property was identified.
If no replacement properties are identified within the 45-day ID period, a 1031 Exchange cannot occur, and the sale becomes a taxable event. The funds held by the qualified intermediary can be returned to the investor no earlier than on day 46 after close of escrow. The regulations prohibit the release of exchange funds or cancellation of the exchange until after 45 days from the sale date. Note however that the investor can direct the qualified intermediary to transfer funds required to complete the purchase of an identified property prior to the expiration of 45 days following the sale.
SCENARIO #2: After 45 days from the closing date when all replacement propert(ies) have been acquired and there are excess funds.
If the investor has identified multiple replacement properties and funds remain in the account after the acquisition of the selected properties and excess funds remain in the exchange account, the investor can cancel all remaining identified properties before midnight of the 45th day. This will allow the qualified intermediary to release any the excess funds no earlier than on day 46. It is critical that the investor formally revoke, in writing, all previously identified preplacement properties that he/she does not wish to purchase by no later than the end of the 45th day in order to promptly receive any excess funds the next day.
SCENARIO #3: Following 180 days after the closing date.
Here is a very important consequence in the regulations that can catch investors unawares: If an investor elects not to acquire one or all of the identified replacement properties, and there are remaining identified but unpurchased properties in the exchange documentation, the exchange funds must be held in the exchange account until 180 days have elapsed from the date of close of escrow (!). Furthermore, the exchange funds are not allowed to be released even if the identified properties become unavailable. An exception can be made if there are written contingencies in the replacement property purchase agreement that make it impossible to conclude the sale.
The regulations do permit the release of exchange funds for permitted expenditures related to acquiring replacement properties including earnest money deposits for acquired properties. Allowed expenses do not include funds required to pay financing costs such as points and application and processing fees.
Investors should review the specific procedures and limitations on accessing funds that their qualified intermediary follows as there can be differences among intermediaries in how they interpret and enforce the regulations. We recommend that investors request and review the specific written procedures for accessing their exchange funds prior from their prospective qualified intermediary prior to opening their exchange account. If necessary, provide written instructions to the intermediary to provide you with an opportunity to revoke previously identified properties prior to the expiration of the 45-day ID period to in order that you can access any excess funds at the earlier possible time.
The team at First Guardian Group can assist investors to locate and select qualified intermediaries that best meet their objectives. Please contact us either by email at info@FirstGuardianGroup.com or via phone at (866) 398-1031.
Investors should review the specific procedures and limitations on accessing funds that their qualified intermediary follows as there can be differences among intermediaries in how they interpret and enforce the regulations. We recommend that investors request and review the specific written procedures for accessing their exchange funds prior from their prospective qualified intermediary prior to opening their exchange account. If necessary, provide written instructions to the intermediary to provide you with an opportunity to revoke previously identified properties prior to the expiration of the 45-day ID period to in order that you can access any excess funds at the earlier possible time.
The team at First Guardian Group can assist investors to locate and select qualified intermediaries that best meet their objectives. Please contact us either by email at info@FirstGuardianGroup.com or via phone at (866) 398-1031.
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