Receipt of Exchange Proceeds by Taxpayer
Taxpayers are required under the 1991 Treasury Regulations to sign a written Exchange Agreement with a Qualified Intermediary that limits the Taxpayer’s right, during the Exchange Period, to receive, pledge, or otherwise obtain the benefits of the Exchange Proceeds that come to the Qualified Intermediary from the closing of the Replacement Property.
The Exchange Period is defined as the end of the 45 day identification period if there is no identification of Replacement Properties made by the Taxpayer, and the end of the 180 day exchange period if an identification has been made by the 45th day, and properties remain to be acquired after the 45th day has passed.
Examples
(1) Taxpayer enters into an Exchange Agreement with a Qualified Intermediary. The Relinquished Property closes with the Qualified Intermediary receiving the Exchange Proceeds from escrow. The next day after closing, Taxpayer changes his mind and decides not to complete the exchange. Taxpayer requests Qualified Intermediary to disburse the Exchange Proceeds to Taxpayer.
Qualified Intermediary cannot disburse the Exchange Proceeds until day 46, if Taxpayer does not identify any potential Replacement Properties. To do so, even though Taxpayer does not want to complete an exchange, means that the Qualified Intermediary does not abide by the restrictions of the Treasury Regulations, that the Exchange Agreement could be deemed by the Internal Revenue Service, in the event of audit, as a sham document, and imperil all other exchanges for Taxpayers assisted by the Qualified Intermediary.
(2) Taxpayer enters into an Exchange Agreement with a Qualified Intermediary. The Relinquished Property closes with the Qualified Intermediary receiving the Exchange Proceeds from escrow. Taxpayer identifies two potential Replacement Properties. Taxpayer acquires one Property on day 46, but does not use all of the Exchange Proceeds. Taxpayer asks Qualified Intermediary to disburse to Taxpayer the balance of the Exchange Proceeds, as Taxpayer does not intend to acquire the other property on Taxpayer’s Identification Statement.
Qualified Intermediary cannot disburse the balance of the Exchange Proceeds until day 181. Taxpayer still has one more property identified on his list. He cannot amend the Identification Statement, as the 45th day has passed. The Exchange Period continues until day 180. Qualified Intermediary must hold the Exchange Proceeds until the expiration of the Exchange Period, despite Taxpayer’s protestation.
