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Restrictions on Exchange Proceeds
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Volume #2005, Issue #5 |
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A "Qualified Intermediary" must limit the
Exchanger's ability to access funds held in
the exchange account in order to meet the
safe harbor requirements specified in the
US Treasury Regulations. Although the deferred
exchange rules provide an Exchanger with the
flexibility to take up to 45 days to identify
and a maximum of 180 days to purchase a replacement
property, there are specific restrictions
placed on the Exchanger's ability to access
exchange proceeds in the possession of the
Qualified Intermediary during the exchange
period.
SECTION 1.1031(k)-1(g)(6)
In a deferred exchange, US Treasury Regulations,
Section 1.1031(k)-1(g)(6), require stipulations
in the exchange agreement which limit the
Exchanger's ability "to receive, pledge, borrow,
or otherwise obtain the benefit of money or
other property before the end of the exchange
period. The Exchanger may have rights to receive,
pledge, borrow, or otherwise obtain the benefit
of money or other property upon or after:
- The receipt by the Taxpayer
of all replacement property to which the
taxpayer is entitled under the exchange
agreement.
- The occurrence after
the end of the identification period of
a material and substantial contingency
that-
- Relates to the deferred
exchange,
- Is provided for in
writing, and
- Is beyond the control
of the Taxpayer and of any disqualified
persons.
WHAT IS THE IMPACT
OF THESE RESTRICTIONS?
Although a thorough discussion
is beyond the scope of this newsletter, the
following are two examples:
SCENARIO #1: The Exchanger
identifies multiple replacement properties
within the 45-day Identification Period, acquires
one of these properties within the Identification
Period, and they would like to receive
the remaining proceeds (referred to as "cash
boot") in the exchange account.
A SOLUTION: Revoke the Identification
of all other replacement properties, so the
remaining proceeds can be released on day
46 by the Qualified Intermediary.
SCENARIO #2: The Exchanger
identifies multiple replacement properties
and acquires at least one, but not all of
these properties. However, they are past
the 45-day Identification Period, and
they would like to receive the remaining proceeds.
RESULT: The remaining exchange
proceeds must be held by the Qualified Intermediary
until the end of the exchange period (day
181) or one of the occurrences specifically
cited in the Section 1.1031(k)-1(g)(6).
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NCS Exchange
Professionals
4811 Hopyard Rd. Suite G-6
Pleasanton, CA 94588
1-866-USE-1031
www.ncs1031.com
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