1031 Exchange Topics

Exchanges with Intermediary

In a Simultaneous Exchange, the old Relinquished Property and the new Replacement Property are transferred concurrently between the two trading parties or with the use of a Qualified Intermediary. In a Delayed Exchange, the Exchanger transfers Relinquished Property to a buyer, and acquires Replacement Property from a third-party seller at a subsequent time. Investors performing exchanges without the benefit of a Qualified Intermediary may risk losing the tax deferred status of the transaction, especially if there is any delay in receipt of Replacement Property or multiple parties are involved.

The Tax Court in Keith K. Klein v. Commissioner, 66 T.C.M. 1115 (1993), determined that one simultaneous three-party exchange was a fully taxable sale. Mr. Klein’s closing escrow instructions simply assigned his rights to the proceeds from the sale of his Relinquished Property directly to the second closing for the purchase of
his Replacement Property. The Tax Court stated that Mr. Klein had unrestricted control over, and thus had constructive receipt of, the Exchange Funds in his transaction. Klein argued that the provision in his earnest money agreement stated that the buyer would cooperate in structuring a Tax Deferred Exchange. He believed
that the funds in escrow were already assigned to the seller of the Replacement Property and therefore, he had no control over the funds. The Court indicated that the cooperation clause would not control the constructive receipt issue. Unwary taxpayers who do not utilize a Qualified Intermediary may be surprised to discover their transaction does not qualify for tax deferral.

Use of a Qualified Intermediary acting under an Exchange Agreement insulates the Exchanger from constructive receipt issues on the proceeds. Although the Qualified Intermediary does not hold any proceeds in a Simultaneous Exchange, it serves the important function of creating a reciprocal trade since the Qualified Intermediary is deemed to have received and transferred the Relinquished Property and subsequently acquired and transferred the Replacement Property to the Exchanger to complete the exchange. The Qualified Intermediary also controls the flow of the Exchange Funds.

CLICK TO DOWNLOAD TOPIC PDF

Locate a 1031 Expert In Your Area

Recent Posts

Can You Change Spousal Ownership in a 1031 Exchange?

Will Adding/Deleting My Spouse Impact My 1031 Exchange?Generally, no changes should be made to the way title to property is held shortly before or after property is sold/purchased via a 1031 Exchange. For example, if title to an apartment building is held by Lisa and...

1031 Update on Capitol Hill – April 2024

1031 Coalition Letter & DC Fly-In​ April 17, 2024 IPX1031, in conjunction with our industry trade organization the Federation of Exchange Accommodators (FEA), worked with the Real Estate Roundtable to circulate an updated 1031 Coalition letter to leaders of...

The Build to Suit Exchange

The build-to-suit exchange, also referred to as a construction or improvement exchange, gives the Exchanger the opportunity to use all or part of the exchange funds for construction, renovations or new improvements to the Replacement Property.

1031 Update on Capitol Hill – March 2024

Biden Releases FY2025 Budget Proposal March 14, 2024 Consistent with its prior budget proposals, the Biden Administration has proposed capping the gain that can be deferred through a like kind exchange at $500,000 per taxpayer ($1,000,000 for a married couple filing...

Pin It on Pinterest