1031 exchanges offer a powerful tax planning strategy for deferring the payment of capital gain taxes on the sale of real property that has been held for rental, investment or use in a trade or business. One of the most crucial requirements when structuring a 1031 exchange is protecting and safeguarding investors’ funds while simultaneously avoiding “actual receipt” or “constructive receipt” of the net proceeds from the sale of the relinquished property.
Avoiding Actual Receipt or Constructive Receipt of 1031 Exchange Funds
Investors (exchangors) are not permitted to have actual receipt or constructive receipt of the net proceeds from the sale of their relinquished property when they are completing a 1031 tax deferred exchange transaction. This means investors (exchangors) 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 (other than the acquisition and receipt of the replacement property or properties).
Qualified Trust Account or Qualified Escrow Account for 1031 Exchanges
This is where a qualified trust account (QTA) or qualified escrow account (QEA) becomes an indispensable tool for holding and safeguarding 1031 exchange funds and ensuring compliance with the applicable tax code, regulations and rulings. A qualified trust account or qualified escrow account provides a secure method for holding and safeguarding investors’ 1031 exchange funds, while ensuring full compliance with Section 1031 of the Internal Revenue Code (IRC) and the applicable Treasury Regulations.
This trust or escrow account structure is established with a regulated financial institution such as Exeter Trust Company (ExeterTrust™) and requires the explicit, written approval of both the investor (exchangor) and the qualified intermediary such as Exeter 1031 Exchange Services, LLC (Exeter1031™) for any fund disbursements.
Qualified trust accounts or qualified escrow accounts are separate, segregated, dual-signature, restricted accounts, and are essential in preventing “constructive receipt” or “actual receipt” of investors’ 1031 exchange funds. These vehicles also ensure investors’ 1031 exchange funds are held as client trust funds that are separate and apart from the qualified intermediary’s corporate funds and assets.
Regulated Financial Institution – Exeter Trust Company
Exeter 1031 Exchange Services, LLC serves as the qualified intermediary and 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 annual regulatory exams, independent CPA financial audits and independent CPA procedural audits.
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. For more information regarding our qualified trust account services, investors (exchangors) can visit our post entitled “Qualified Trust Accounts in a 1031 Exchange” or contact Exeter Trust Company.
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 trust account or qualified escrow account 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.