Tools and Investment

IRS 1031 stipulates that the seller cannot have “actual or constructive receipt” of the funds before receipt of the replacement property.  That means that if the seller gains control of the funds, then he has constructive receipt, and the tax deferral is voided.  In other words, if the seller pockets the money from the sale of Property 1, with the intention to pile it into Property 2, he loses out on the tax deferral.  As soon as cash hits the pocket, the 1031 Exchange is void.

To avoid the cash-in-pocket scenario, the seller must have an unrelated third party hold the funds until the replacement property is purchased.  The third party is generally referred to as an “accommodator,” “facilitator,” or “exchanger.”  The seller must be very careful that his facilitator is a reputable outside party.  If the facilitator misappropriates the funds, then the seller loses all of his money and must pay tax on the profit of the sale of the first property, as the exchange was never completed. 

The seller can, however, have a simultaneous exchange.  That means that both transactions close in the same escrow.  It is difficult to plan that carefully, but a delayed close of escrow can make it possible, providing that the other parties involved are flexible.