When Can I Get My 1031 Exchange Funds Back?

The short answer

Once your relinquished property closes, your exchange funds stay with your qualified intermediary until one of a few specific release conditions is met. In most cases that means the end of your exchange period. This is not a policy your QI invented. It comes from the Treasury Regulations that make the exchange work in the first place.

The rule: Treasury Regulation 1.1031(k)-1(g)(6)

Treas. Reg. § 1.1031(k)-1(g)(6), often called the "(g)(6) restrictions," requires your exchange agreement to state that you have no right to receive, pledge, borrow, or otherwise obtain the benefits of the exchange funds before the end of the exchange period, subject to two narrow exceptions.

When 1031 exchange funds can be released early

There are only two routine paths:

1. You identify nothing. If you have not identified any replacement property by the end of the 45-day identification period, the funds can be released any time after that period ends. In practice, day 46.
   

2. You receive everything you identified. If you did identify replacement property, funds can be released once you have received all of the replacement property you are entitled to under the exchange agreement. Any leftover cash goes back to you at that point, subject to any withholding requirements imposed by your state.

A third path exists but is rarely available. The regulation allows release after the identification period if a material and substantial contingency occurs that relates to the exchange, is provided for in writing, and is beyond your control. This is very specific and is not a general escape hatch for a deal that falls apart.

The scenario that surprises people

Say you identify three properties, close on one of them on day 60, and decide against the other two. You cannot get the remaining funds back on day 61. Because you did not receive all of the property you identified, the second exception does not apply, and the funds stay with your QI until the exchange period ends.

You can still use those funds to buy one of the other identified properties before the deadline. You just cannot take the cash early.

Why a QI will not make an exception

The qualified intermediary safe harbor under § 1.1031(k)-1(g)(4) applies only if your exchange agreement expressly limits your rights as provided in (g)(6). Without that language, the safe harbor does not apply, and whether you were in constructive receipt of the sale proceeds gets decided under general tax principles instead. A QI that agrees to release funds outside these rules is not doing you a favor. It is putting your entire deferral at risk.

What this means for you

Plan your liquidity before you close. Once the relinquished property sells, that money is out of reach until a release condition is met. If you expect to need cash out of the deal, the time to structure that is at closing, not on day 90.

At Current 1031, our exchange agreement contains the (g)(6) restrictions as the regulation requires, and we follow them to the letter. Your 1031 exchange funds sit in a segregated exchange account, earning interest, until a valid release condition is met.

If you do expect a situation where excess funds sit in the exchange account for months, the interest rate your QI pays matters. Current 1031 pays a flat 3% rate, one of the highest available. On a $2 million exchange held the full period, that is roughly $30,000 to you.

This article is general information, not tax or legal advice. Talk to your CPA or attorney about your specific exchange.