Earnest Money Deposits
Earnest Money Deposits, Extension and/or Option Payments Released to Investor Before Closing of Relinquished Property Sale
Early payment of earnest money deposits and/or other funds are common clauses that are often written into many Purchase and Sale Contracts; these actions are typically utilized by Buyers to entice an Investor to sell or concede other actions from the Investor.
If such payments are not structured properly, however, they can create taxable income to the Investor even in a 1031 Exchange transaction that typically results in a tax-deferred exchange. The Internal Revenue Service provides little in the way of guidelines when it comes to early payment of funds, which presents challenges during a tax-deferred exchange; therefore, it is vital that a Qualified Intermediary makes sure that any such early payment is handled correctly at all times.
Early payment receipt can be made to one of two individuals; the Investor directly, or the Investor’s Qualified Intermediary. If made directly to the Investor - which is very common early in any given 1031 Exchange transaction - the early payment can either be kept as taxable boot, or, before the transaction closes, deposit said early release monies back into the relinquished property sale transaction, after which the funds may be forwarded to the Investor’s Qualified Intermediary.
There is the chance with early payment that the Federal Government (IRS, Department of Treasury) could consider early payment a taxable distribution resultant from the sale transaction of the relinquished property; taking this into mind, the Investor should always be aware of any and all risks that may come with early payments, and they can result in possible loss of tax-deferred status..
Disclaimer: 1031 exchange made simple does not guarantee the performance of the QI's in our referral network and we can not be held liable for any misrepresentations or mistakes in regards to a 1031 exchange by one of the QI's that we refer to you. 1031 Exchange made simple does not provide tax advice nor can we make representations regarding the tax consequences of an exchange transaction. 1031 Exchange made simple is a 1031 QI Referral Network. 1031 made simple is not responsible (in any way) for the performance, creditability, and financial condition of any QI in our network. In this new economic environment it is imperative that all potential 1031 exchange customers do their own due diligence and research on any QI that they may use, on a 1031 exchange. Please verify and check the validity of the Bonding and Insurance of your QI. It may be wise to have your 1031 exchange accounts set up as separate, individual customer accounts. Our web site is to be used as a information based web site only. All parties doing a 1031 exchange must consult their tax advisors or attorney for this information.
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