When should you begin a 1031 exchange?

The timing of when you set up your 1031 exchange is critical to its success. I often receive inquiries from investors, after they have closed on the sale of their relinquished property, seeking my services as a qualified intermediary for their proposed 1031 exchange transaction.

Unfortunately, in those cases, I have to relay some bad news. Not only can I not help them, they cannot even set up a valid 1031 exchange at that point. Why? Because, even if they have not cashed the check they received from the sale of their relinquished property, they are deemed to have constructive receipt of the sale proceeds. In the eyes of the IRS, this constructive receipt absolutely invalidates any possibility of an exchange related to the sale.

In order for a valid exchange to occur, the investor selling relinquished property cannot have possession in any way of the sale proceeds. It must be held in trust by the Qualified Intermediary until the purchase of the replacement property occurs, at which time the QI will transfer the funds to the new seller.

If you are an investor considering a 1031 exchange, it is important to alert your financial advisors before you sell your property. That way, everything can be structured properly before the sale.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.