LEGAL HOTLINE ARCHIVE
Taxation

See also IRS Code 1031

Exchanges

Q. A property was sold and proceeds were placed in a qualified escrow account until exchange property could be identified. Seller of property began considering optional investment possibilities and requested that proceeds from sale be mailed to her. A check was issued from escrow account and mailed to seller. In the meantime, seller reconsidered and realized that she would like to participate in an exchange after all. The check remains in the hands of the seller but has not been cashed.

What is the correct procedure for continuing with the exchange? Should the seller immediately return the check to the escrow agency? Has the seller lost any tax advantages from the exchange by her "temporary" request for the funds even though the check was not cashed and she wishes to continue with the exchange?

A. Even though the seller has not cashed the check, it is our opinion that, under the facts and pursuant to applicable Treasury Regulations, the seller has actually or constructively received money for the "relinquished" property - before actually receiving the (like-kind) replacement property. Thus, it is our further opinion that the Internal Revenue Service would assert the transaction constitutes a sale and not a deferred exchange.

Further, while we can find no case exactly on point, we believe a court would more likely than not hold that, under these circumstances, the transaction does not qualify for Section 1031 treatment - regardless of whether the check is returned to the qualified escrow account, even assuming the escrow account is "qualified" under applicable Treasury Regulations.

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