Alright so you're doing a 1031 exchange, you’ve sold your relinquished property, and parked your proceeds with the intermediary. If you're like a lot of real estate Investors you are real estate rich and cash poor. You don't have a lot of extra cash laying around to advance for an earnest money deposit.
How can we make an earnest money deposit on the replacement property if all of your cash is tied up in the 1031 intermediary’s account?
Very easy. Enter into a purchase agreement for the replacement property, give it to the intermediary and say “Hey intermediary, please assign yourself into this contract so that you can advance a portion of the exchange funds to the seller or the seller's title company as the earnest money deposit.”
Once you have a contract for the replacement property it's very easy to assign that contract to the intermediary so that they step into the shoes as the buyer of that property and can advance the exchange funds.
What you can't advance money for are loan related expenses, so if you have a loan origination expense don't plan on funding that out of the exchange account.
Sometimes taxpayers don’t want to wait for the slow intermediary to wire transfer the earnest money deposit. Instead they want to write a check and attach it to their offer so it looks more appealing to the seller. Then they say “when can I get my earnest money cash back?”
At the closing of the replacement property you can instruct the settlement agent to not apply the earnest money deposit towards the purchase price, but instead to refund your money at the time of closing. Then your intermediary can come in with all the 1031 funds to fund the acquisition and you’ll get that earnest money back at closing.
- 1031 Hotline: If you have questions about earnest money deposits in a 1031 exchange, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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