Can the earnest money deposit for the replacement property be paid from the exchange proceeds that are held by the qualified intermediary in a 1031 exchange?
Earnest Money in a 1031 Exchange
Many real estate Investors are real estate rich but cash poor. They don't have a lot of extra money in the bank account to make a substantial earnest money deposit. So if they want to make an offer that looks impressive, one that will catch the eye of the seller with a substantial earnest money deposit, they need to tap into the funds held by the qualified intermediary to advance that large deposit.
Fortunately, the treasury regulations permit the intermediary to advance the 1031 funds to the seller or oftentimes to the seller's title company, provided that the intermediary is assigned into the purchase agreement and that proper notice is given to the other parties. In a competitive market and with the extra pressures of the exchange deadlines looming, exchangors often want to lock-in a replacement property under contract. They really want to make strong purchase offers. We frequently will help the taxpayer advance the 1031 funds needed for the earnest money deposit and help them be the winning bidder in this tight seller's market so that their offer is most advantageous and appealing to the seller.
- 1031 Hotline: If you have questions about putting down earnest money in a 1031 exchange, feel free to call me at 612-643-1031.
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