Using 1031 Funds for a Deposit
In order for Legal 1031 Exchange Services to use exchange funds for a contract deposit on the replacement property we must first be assigned into the transaction. In order to be assigned into the transaction we need a signed contract and the 1031 replacement property documents signed as well. This can create a “chicken or the egg situation” where you need the deposit to obtain a signed contract, but you need a signed contract in order to assign into the transaction allowing the qualified intermediary to send the funds.
Accordingly, here are two options to use 1031 funds for a contract deposit:
- Exchanger can use “non-1031 funds” for the deposit. At the closing to purchase the property the qualified intermediary sends in an amount equal to the purchase price of the property (less the amount of a mortgage, if any), including an amount equal to the contract deposit. This generates a credit equal to the amount of the original contract which is returned at closing to the exchanger.
- A copy of the unsigned purchase contract is sent to Legal 1031. The 1031 replacement property documents are prepared and both the 1031 replacement property documents, as well as the contract are signed by the exchanger. The contract and 1031 replacement property documents are sent to the seller. Seller signed the contract and 1031 exchange Notice of Assignment of Contract and sends the signature pages of both to qualified intermediary with wiring instructions. Since the qualified intermediary is now assigned into the transaction, we can initiate the wire to fund the deposit. Once the seller confirms receipt of the wire transfer the original contract and Notice of Assignment of Contract are returned.
Legal 1031 Exchange Services, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction. Property owners must consult their tax and/or legal advisors for this information. Our role is limited to serving as qualified intermediary to facilitate your exchange. © 2021 Legal 1031 Exchange Services, LLC All rights reserved.