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Q. Who holds the money?
A. Most exchanges are structured as "deferred" exchanges, meaning
that you sell your "relinquished property" before you buy your
"replacement property." (Technically, of course, you are not
"buying" or "selling", but exchanging.) Someone, a qualified
intermediary, or a trustee, must hold your money during the period between the
sale and the purchase.
Be careful who holds your money! Be particularly careful in choosing someone
over the Internet. What do you know about this person or company? A slick home
page only means that the person or company has good advertising skills, not that
they are knowledgeable, or, more importantly, trustworthy.
Generally, we prefer to assist our clients in finding a qualified friend,
business associate, or relative (who is not disqualified, see below) to hold the
money, someone they know and trust. Holding the money is not difficult, but it
does require honesty if your money is to be safe.
The money can be held by anyone who is not a "disqualified person."
The definition of a disqualified person is set forth in IRS Reg 1.1031(k)-1(k).
With some exceptions, it cannot be anyone who has been your:
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- Employee
- Attorney
- Accountant
- Investment Banker, or
- Real Estate Agent or Broker
within two years of when you sell the first property you relinquish in the
exchange, and it cannot be a close family member (sibling, spouse, ancestor, or
lineal descendants).
It almost seems like the Internal Revenue Service made a list of everyone you
would trust to hold your money, and then disqualified those persons! In most
cases, however, we are able to help our clients find a person they know who
qualifies. When we cannot, we can always recommend someone we know and trust,
who has experience in handling exchange funds, and who charges a reasonable fee.
The main thing is to be sure you know who is holding your money. An exchange
which fails may have very bad tax consequences, but at least you will get to
keep what is left over. If your money is held by someone who steals it, however,
you may have nothing. This is why we prefer to help our clients find someone
they know and trust to hold the money.
Rice & Stallknecht, P.C. would be honored to
assist you.
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