Can 1031 Funds Be Used For An Earnest Money Deposit On The Replacement Property?

Q: Can 1031 funds be used for an earnest-money deposit on the replacement-property?

A: A qualified intermediary may advance exchange proceeds from the 1031 escrow account for earnest money deposits that will be credited toward the purchase of replacement property, provided that there is:

(1) An executed purchase agreement between the exchanger as purchaser and the seller of the replacement property that requires an earnest money deposit;

(2) The qualified intermediary is assigned the purchaser/exchanger's rights (typically not obligations) in the purchase agreement;

(3) Written notice of this assignment of purchaser/exchanger's rights in the purchase agreement is given to the seller.  Typically seller acknowledges in writing receipt and consent to the assignment.

1031 Tip:  Always make sure that the seller acknowledges receipt and consents to the assignment (in writing) and agrees that if the purchase agreement is terminated or cancelled that the seller will return the earnest money deposit directly to the qualified intermediary and NOT to the purchaser/exchanger.

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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