When you’re doing a 1031 or even contemplating doing a 1031 exchange, the name of the game is to keep all of your options on the table as long as possible. When you’re selling a relinquished property and you know you’ve got a looming tax bill, you may not know what you want to buy for a replacement property but you do know it’s worth your while to try to defer those gains.
Identification of Property
So you’ll set up your 1031 exchange and hope and pray that you can identify a replacement property or properties that you want to purchase. So you may identify one, two, or three properties in hopes that you can acquire those properties. But if it turns out that you can’t or do not want to buy those identified properties, then you’re going to ask yourself – “well if I’m not going to buy these exchange properties, can’t I just get my money out of the exchange account, fold up my tent and go home?”
The answer is if you’ve paid a qualified intermediary to provide you a service and that service is to insulate you from receiving your exchange funds, can you just pack up your tent and go home? Or do the treasury regulations require the intermediary to continue to hold the funds until you receive the properties you designate, or the 180th day.
Your qualified intermediary really should hold your funds until the end of the exchange period. That way they legitimize their role in the transaction as a neutral third party that’s simply acting as a vessel to facilitate the exchange, and to the extent that you had received any replacement property that your exchange is valid as to those replacement properties.
The two times that you can tank your exchange are at midnight of the 45th day. If you choose not to do a 1031 exchange simply don’t identify any replacement properties and the exchange will fail for lack of an identification. Alternatively, wait until the end of the 180 days and get back your unused surplus exchange funds after the exchange.