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Let’s look at when you can get money out of a 1031 exchange—an important topic in today’s hot market. With an exchange you need to identify a property within a certain time frame and rescind that identification within an appropriate time frame if the property isn’t right for you. Protect yourself with knowledge and avoid having your money unnecessarily tied up.
Day 45 and the 1031 Exchange
When you get into a 1031 exchange, as everybody knows, you have 45 days to identify a replacement property or properties. There are three different identification rules. The bottom line is that when you identify a property, you must do it in a suitable manner to a suitable person within that 45-day time period. That 45th day is critical: Come that day, you’re either totally committed to completing the exchange, or I would recommend that you kill the transaction. And the reason I say that is, if we go back 20 years, if you terminate a transaction and said, “Hey David, I want to terminate my exchange. I’d like my money,” then I’d give you your money.
But we had some rulings in the mid 2000s that basically said that if we as an accommodation company, as a facilitator, do not follow what are known as the 1031 G6 rules, it not only would nullify your exchange, which at that point you probably don’t care about, but it nullifies the exchange company’s procedures—so not just yours but everything we’re working with. That is why nobody in this business that does 1031s for a living is going to give you your money outside the 1031 G6 rules. In a nutshell, what those rules say is that you can only get your money after you’ve received all properties you have the right to receive.
That means that no time prior to the 45th day if you want to pull money out of an exchange, or let’s say you want to pull $10,000 out, go take a trip or do something else, you’ve got to pull it out at closing and it’s got to be excluded from the exchange. Our assignment agreement includes a blank asking whether you’d like to receive any potentially taxable money. You’d write in there $10,000, and you’re going to walk out of escrow with $10,000. The $10,000 was excluded from the exchange. If it’s not done in the appropriate manner, that action could terminate your transaction. So it’s got to be done correctly. If the money comes to us, you can only get that 10K after you’ve purchased everything you have the right to buy.
1031 Exchange and Opportunity Zones
It used to be that people would get to that 45th day and if they hadn’t found properties, they would just ID something—sort of like throwing pasta at the wall to see if it sticks. Today I advise people not to do that. Because if you’ve identified a property just because you want that option to go buy it and you change your mind, I can’t give you your money until day 181.
Suppose you’re talking about something and you’ve realized the 1031 is not going to fit your needs; you want to shift gears and go into the Opportunity Zone. You only have 180 days from settlement. By law, I can’t give you your money until day 181, which kicks you outside that period for the Opportunity Zone. If you’re contemplating an OZ, make sure you do something that’s going to allow you to get into it. So once again, by that 45th day, if you’ve identified properties, you want to rescind the identification. If you haven’t identified properties, don’t, and then you’ll be entitled to that money on day 46 and you can roll it into the Opportunity Zone.
1031 Exchange G6 Rules
We put the 1031 G6 rules into every ID packet we send, which goes to every taxpayer we work with. In fact, there’s a signature on the bottom of that page talking about when you can get your money, and they all sign it. But a lot of times people don’t read everything. This is one of those situations that’s very frustrating for us. Imagine if you identified a property just because and now you’re on day 60 and you realized you don’t want it but you’ve found another property you do want. Your brokers worked hard to get it tied up and you think that we will be able to send you the money for this other property. We can’t. We can’t by law.
So you found another property and you didn’t rescind your identification. We have something identified there. Even if that property is sold, by the way, it doesn’t mean it cannot be acquired. It’s still something that’s there. The government’s going to look at it and say, hey, just because somebody else bought it doesn’t mean you can’t buy it. This means that the 45 days is critical. You’re either in or you’re out on day 45. Make sure you know that because if you find something else or you want to shift gears in the OZ, you need to have those options set up.
Think about it and think about it some more. Get it done inside the 45 days. That way you’re either in or you’re out on that date. If you’re in, then we’re going to work to get you what you need. If you’re out, then you have the ability to go get what you want.
A 1031 exchange is complex. Using an exchange accommodator like Equity Advantage puts a professional in your corner who knows all the rules. It just takes a phone call to get started, 503-635-1031.