When is it too late for a 1031 Exchange?

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Occasionally, I receive a phone call asking when is it too late to initiate a 1031 exchange explaining they have not deposited the check received at the closing. Another example is when the potential exchangor bought a property two weeks ago and wants to do a reverse 1031 exchange. These are all valid questions with a common denominator: lack of planning.

1031 Exchange Rules

1031 exchanges are riddled with rules and guidelines that to the uninformed can be overwhelming. One of those rules, known as the g(6) limitations states, the exchangor can not receive, pledge, borrow or otherwise obtain the benefits of the money or other property held in the Exchange Account. This means the Exchangor can not touch the exchange funds. If the funds have been touched or deposited into their account, constructive receipt has been fulfilled effectively eliminating the possibility of a tax deferred exchange.

Alternative Circumstances:

• What if on the day of the closing or during the closing a 1031 exchange should be initiated? That is fine and we are pleased to accommodate last minute like kind exchanges. 
• What if the closing has ended and the escrow company has not disbursed the exchange proceeds to the Taxpayer? A 1031 exchange can be initiated though the settlement statement should be changed to reflect the 1031.
• What if the closing has ended and the exchange proceeds check has been deposited into the Taxpayer's account.The only way to initiate a 1031 exchange is to unwind the closing. This is difficult to do especially when a lender is involved but possible.

Conclusion

Planning is critical to understand and take ownership of the 1031 process. Talk with your tax advisor whenever selling real or personal property held for investment or used in a business.  Ignorance is no excuse.