Can a Taxpayer obtain the return of their exchange funds at any time during a 1031 exchange?

Taxpayers entering into 1031 exchanges cannot be in actual or constructive receipt of the exchanges funds. If an agent of the taxpayer holds the exchange funds, then the taxpayer will be deemed in constructive receipt since it is assumed that the agent will do whatever the taxpayer wants with the funds. Paragraph (g)(4)(i) of section 1.1031(k)-1 of the regulations provides that in the case of a taxpayer's transfer of relinquished property involving a qualified intermediary, the qualified intermediary is not considered the agent of the taxpayer for purposes of section 1031(a) only if the agreement between the taxpayer and the qualified intermediary expressly limits the taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary.

Based on the foregoing, and to preserve the exchange, any funds remaining in the exchange held by the Qualified Intermediary will be disbursed to the taxpayer only after the conclusion of the 180 day exchange period.  Despite the restrictions on fund disbursement, funds may be disbursed at an earlier time by the qualified intermediary to the taxpayer, but only under the following circumstances:

1. After the end of the 45 day identification period, if no Replacement Property has been identified; or
2. If the taxpayer has identified replacement property, after the taxpayer has received all of the identified Replacement Property to which the taxpayer is entitled; or
3. After the end of the 45 day identification period, upon the occurrence of a material and substantial contingency which relates to the deferred exchange, is provided for in writing, and is beyond control of the taxpayer or a disqualified person.

The Service has ruled in Private Letter Ruling 200027028 that an exchange agreement that would allow a qualified intermediary to distribute funds from an owner's exchange account before the end of the exchange period does not meet the exchange agreement requirements. Therefore, Qualified Intermediaries strictly follow these regulations.  Note, however, that a qualified intermediary can deliver deposits for the purchases of replacement property.