1031 Exchange

Today TaxMama hears from Gaetano in the Tax Parlor, who asks “When you do a section 1031 exchange for investment real estate are you “required” to use a qualified intermediary to receive the funds from the sale of the first property or is this just an advisory to make sure you do the exchange within the time limits, etc.?”

Dear Gaetano,

You only need the intermediary if you want a tax-free exchange.

Once the taxpayer receives the funds – it’s ALL OVER!
You’ve just blown your tax deferral.

However, since the property is identified and the purchase escrow will close shortly afterwards, you might be able to have the funds transferred directly to the next escrow, never being soiled by the sellers hot little hands. I believe the escrow company may qualify as an intermediary for this purpose.

With this much money at stake, be SURE the seller consults with his/her tax professional for guidance BEFORE either escrow closes.

And preferably, get the guidance in writing from the tax professional who will be preparing the tax returns involving these sales/purchases.

Read IRC 1031 and all the material IRS provides before issuing a written opinion. This page has a brief explanation and offers links to more resources on the topic of 1031 exchanges (See IRS link below).

And remember, you’ll find answers to lots of questions about 1031 Exchanges and other tax information, free. Where? At TaxMama.com

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