It's really sad when we get a call from somebody and they say “I sold my relinquished property two weeks ago and I've just decided to do a 1031 exchange. Can you set me up to do a 1031?”
This call comes in quite frequently, partly because people are ignorant about the requirements of Safe Harbor 1031. They think that they can just keep their money in an escrow account or leave the money with the title company and if they choose to do at 1031 they can set it up after the fact.
The problem is that in order to do a valid Safe Harbor 1031 you have to have an exchange agreement with a qualified intermediary (or facilitator/accommodator) in place before you dispose of the relinquished property. Furthermore, you have to assign your rights in the purchase agreement with the buyer so that the relinquish property purchase agreement is assigned to the intermediary. The intermediary then directs you to deed that property straight to the buyer.
Notice of Assignment
On top of that you have to give written notice of your assignment to the intermediary to all of the other parties to the purchase agreement (e.g., the buyer of the Relinquished Property). If you don't have all of that in place before the closing occurs on the sale of your relinquished property then you don't have a defensible Safe Harbor 1031. The net result is that closing, when the benefits and burdens of ownership shift to the buyer who has actual or constructive receipt of the money.
Even if you leave your money in an escrow account at the title company, it's still your money. You still have the right to go in and take it out at any time (you have control over the proceeds). The only way to do it under the Safe Harbor regulations is to make sure that you have it set up with a facilitator or intermediary before you go to closing and dispose of that property so that you’re insulated so you don't have actual or constructive receipt of the funds.
- 1031 Hotline: If you have questions about escrow and 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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