Some 1031 Exchange Questions

[Michael Hayworth]

I've read some online resources but still have a lot of questions. Here is the first batch of questions:

1. One intermediary my CPA recommended says this on their website:

1. [First, set up an account]
2. "Second, via an executed assignment, ERI assumes the purchase contract and instructs the closing agent to deed the property from the investor to the buyer. The sale proceeds go directly to ERI to be held in a secure segregated bank account."

Can someone explain the "assignment" to me? And the funds aren't just tracked by my CPA - they have to be held in an intermediary' account?

2. If the funds are held in an intermediary's account, how are they accessed? I buy a lot of properties at trustee auctions, which requires that I come with cash in hand. Is that not doable if using a 1031?

3. How long does it take to set one of these up? I have a property closing on 12/29, and another in January.

I'll start there and ask follow-ups based on the answer.

Thanks,

[Bill Exeter]

Originally posted by @Michael Hayworth:

I've read some online resources but still have a lot of questions. Here is the first batch of questions:

1. One intermediary my CPA recommended says this on their website:

1. [First, set up an account]
2. "Second, via an executed assignment, ERI assumes the purchase contract and instructs the closing agent to deed the property from the investor to the buyer. The sale proceeds go directly to ERI to be held in a secure segregated bank account."

Can someone explain the "assignment" to me? And the funds aren't just tracked by my CPA - they have to be held in an intermediary' account?

2. If the funds are held in an intermediary's account, how are they accessed? I buy a lot of properties at trustee auctions, which requires that I come with cash in hand. Is that not doable if using a 1031?

3. How long does it take to set one of these up? I have a property closing on 12/29, and another in January.

I'll start there and ask follow-ups based on the answer.

Thanks,

Hi Michael,

Let me try to simplify the answer for you. 

The property that you sell and the property that you buy must be integrated into your 1031 Exchange.  This is a requirement under the tax code and regulations.  The way the properties are integrated into your 1031 Exchange is to have you "assign" the Purchase and Sale Agreement to the Qualified Intermediary so that it will be included inside of your 1031 Exchange transaction.  This means that the Qualified Intermediary steps into your shoes as the seller of your relinquished property and then the buyer of your replacement property. 

This also means that the "rights" to receive the net proceeds from the sale belong to the Qualified Intermediary and not you as the taxpayer.  This prevents the taxpayer from having actual or constructive receipt of the funds and allows the taxpayer to defer the payment of their taxes.

The funds can not be accessed by you directly.  You would provide direction as to what property you are buying and who is handling the closing.  The Qualified Intermediary would then work directly with the closing agent to complete the purchase. 

Properties acquired through a foreclosure action or any other type of auction process can be completed, but can get more complex depending on how the closing process works.  For example, there is no contract to assign to the Qualified Intermediary when you are buying through/at a Trustee's Sale, so other steps must be taken to properly structure these 1031 Exchange transactions. 

I can not speak for other Qualified Intermediaries, but we offer same day service for standard, Forward 1031 Exchange transactions, and can easily get you set-up prior to December 29th.