March 1, 2019
There are several common misconceptions about the Internal Revenue Code 1031 exchange process. To keep investors on the right track and focused on what is important to that investor, let’s clear up a few of these most common misconceptions:
Misconception #1: To execute a 1031 exchange the investor may only file a form with the IRS and as long as the seller doesn’t utilize, spend or touch the proceeds from the sale of the property they are relinquishing, the investor can perform an exchange at any time.
Wrong! THIS IS FALSE. The investor may not have actual nor constructive receipt of the sale proceeds. This action will trigger a taxable event. Investors need to use a special non-related “middleman” called a Qualified Intermediary [“QI”] or Accommodator who is required to hold the sale proceeds for them and who then uses those proceeds to buy any replacement property at their express direction. Once the sale of the property the investor is relinquishing closes, funds must be directed to the investor’s QI until the purchase or “up-leg” portion of the exchange is completed.