Money Placed with a Qualified Intermediary Cannot Be Touched

In doing a 1031 exchange, it is vital that a client never touch any of the proceeds from the sale of the relinquished property.  These funds must be placed with an intermediary at the closing of the sale, if being used to purchase the replacement property.  Sometimes people like to keep some of the cash proceeds from the sale, and this is permissible, so long as instructions are given to the QI beforehand.  Documents can then be prepared showing that the amount of cash that is kept is outside of the exchange.  Keep in mind, however, that this cash will be taxed.  If there is any money left over with the QI after the exchange has taken place, an investor must still wait for the 180 days to be over before getting the remainder of the cash back.

Another thing to remember is that when you are purchasing your new property, only the earnest money can come from the funds held by the intermediary.  I suggest to clients that the option money (in Texas contracts), as well as the cost of an inspection, and loan fees payable up front be paid directly by the buyer.  This is because, if you, as the purchaser, do not close on the property, there is a chance that you will be deemed to have "touched the funds", thereby invalidating the whole exchange.

These rules may seem strict, but need to be followed closely so that your 1031 exchange is airtight against the taxing authorities if they ever argue the case.  For more information, check out our site at www.1031exchange.co