Avoiding Actual Receipt or Constructive Receipt of 1031 Exchange Funds
Clients are not permitted to have actual receipt or constructive receipt of the net proceeds generated by the sale of their relinquished property when they are structuring a 1031 tax deferred exchange transaction. This means clients are not allowed to actually receive the net proceeds or to have control over or receive any benefits from the net proceeds from the sale of their relinquished property.
Safe Harbor – Qualified Intermediary
The Internal Revenue Service or IRS created and allows a safe harbor provision whereby the clients’ 1031 exchange funds can be received, held and safeguarded by a neutral third party referred to as a qualified intermediary, often referred to as an accommodator or facilitator, to avoid actual or constructive receipt of their 1031 exchange funds.
Qualified Trust or Qualified Escrow Account
However, industry best practices suggest that 1031 exchange funds should always be held in a qualified trust account or a qualified escrow account and never held in the corporate name or corporate capacity of the qualified intermediary.
The Treasury Regulations (Treas. Reg. §1.1031(k)-1(g)(3)) allow clients and their qualified intermediary to set-up and use a qualified trust account or a qualified escrow account to actually receive, hold and safeguard their 1031 exchange funds. Both of these vehicles ensure the clients’ 1031 exchange funds are held as client trust funds or client escrow funds that are separate and apart from the qualified intermediary’s corporate funds and assets.
Exeter Trust Company
Exeter 1031 Exchange Services, LLC deposits, holds and safeguards clients’ 1031 exchange funds in separate, segregated, dual-signature qualified trust accounts with Exeter Trust Company. Exeter Trust Company is licensed, regulated and examined by the Wyoming Division of Banking and undergoes an independent CPA audit.
Exeter Trust Company also serves as trustee for qualified trust accounts or escrow agent for qualified escrow accounts for 1031 exchange transactions administered by other qualified intermediaries.
State of Washington Required Notice
Washington state law, RCW 19.310.040, requires an exchange facilitator to either maintain a fidelity bond in an amount of not less than one million dollars that protects clients against losses caused by criminal acts of the exchange facilitator, or to hold all client funds in a qualified escrow account or qualified trust that requires your consent for withdrawals. All exchange funds must be deposited in a separately identified account using your taxpayer identification number. You must receive written notification of how your exchange funds have been deposited. Your exchange facilitator is required to provide you with written directions of how to independently verify the deposit of the exchange funds. Exchange facilitation services are not regulated by any agency of the state of Washington or of the United States government. It is your responsibility to determine that your exchange funds will be held in a safe manner.