Taking Cash Out of a 1031 Exchange
Taking Cash Out of a 1031 Exchange
By: Shannon Kinnard
The exchange process can be complex so careful planning can help you maximize the tax benefits. One scenario some investors come across is wanting to take cash out of a 1031 exchange. There are some restrictions and some alternative options for investors to keep in mind:
- Restrictions – There are IRS guidelines that dictate timing for an exchanger to access the exchange funds, commonly referred to as the “G-6 restrictions”:
- If the exchanger does not identify one or more replacement properties by the 45th day identification deadline, the exchange funds can be returned to the exchanger after the 45th
- If the exchanger identifies one or more replacement properties by the 45-day deadline, the exchange proceeds will be held until the exchange is complete. Completion is determined by the sooner of (a) when the exchanger has acquired all of the identified replacement property, or (b) the end of the exchange period (after the 180th day).
- Some Alternative Options – Revocation, Cashing Out from the Sale or Build-to-Suit Exchange:
- Revocation: If you have identified potential replacement properties, but decide not to do an exchange and you are still within the 45-day identification period, you may revoke your identification. The exchange funds, less any required state tax withholding, may be disbursed to you after the 45th Note: it’s not possible to take only a portion of the funds out of the exchange; this option only allows you to cancel the exchange and be subject to taxes.
- Cashing Out from the Sale: If you know you will only be using a portion of the equity from the sale for your purchase, you can request that escrow transfer the non-exchange portion to you directly at close of the sale. While cashing out funds is a taxable event, you won’t have to wait until the exchange is complete to collect those funds.
- Build-to-Suit Exchange: If you are acquiring a property that needs improvements or repairs, with the help of your Qualified Intermediary (QI), you can request to structure the exchange as a build-to-suit exchange. A build-to-suit exchange, also known as an improvement/construction exchange, allows the use of exchange funds for property improvements, including construction and repairs. For example, if you are expecting $2,500,000 in sale proceeds, but only need $2,250,000 to acquire your replacement property, using a build-to-suit structure, you can use the $250,000 balance for improvements/repairs to the property. Note: these improvements must be completed within the 180-day exchange period and the build-to-suit structure requires coordination with your QI.
Strategic planning with your tax advisor and our team of experts at Genesis Bank Exchange can help maximize the potential of your investments. If you’re interested in learning more about the 1031 exchange process and how it may benefit you, connect with the Genesis Bank Exchange team by calling 800.797.1031, or explore further details on our website: https://www.mygenesisbank.com/1031Exchange.
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