Believe it or not, occasionally an exchange doesn’t go according to plan. Any number of things can happen to cause problems. The exchange client (“exchanger” or “taxpayer”) can fail to locate and identify suitable replacement properties before the end of the 45-day identification period. Sometimes something will make it so the exchanger cannot close on any of the replacement property he identified. And sometimes the exchanger just changes his mind and decides not to exchange at all.

1031 exchange release funds

What happens when something does go wrong? Let’s investigate.


As you likely already realize, the Internal Revenue Service (“IRS”) established a set of Safe Harbor regulations that set out guidelines under which a taxpayer can conduct what is known as a Section 1031 exchange. Part of those provisions are what we in the industry refer to as the (g)(6) limitations. The (g)(6) limitations must be stated clearly in the Exchange Agreement signed by the taxpayer and the intermediary. What they do, in a nutshell, is specifically limit the taxpayer’s rights to receive, pledge, borrow or otherwise obtain the benefits of the proceeds from the relinquished property sale prior to the expiration of the exchange period. These restrictions are all-encompassing and must remain in effect throughout the exchange period. The (g)(6) limitations restrict the intermediary from releasing exchange funds except at certain times. The intermediary may release funds to the closing agent of the replacement property when it is ready to close; otherwise, the intermediary must hold the funds until the expiration of the exchange period.

The expiration of the exchange period is not more than 180 days after the closing of the relinquished property, but oftentimes can be sooner. It is the earliest of these events:

  1. After the end of the 45-day identification period if the exchanger has not properly identified replacement property; or
  2. After the exchanger has received all of the identified replacement properties to which s/he is entitled; or
  3. At the end of the 180-day exchange period.

There is one other possibility that is rare and should only be used with the greatest of care. If the taxpayer believes that a material and substantial contingency that is: (a) related to the deferred exchange; (b) provided for, in writing, and (c) beyond the control of the taxpayer and of any disqualified person, other than the person obligated to transfer the replacement property to the exchanger. An example might be if the taxpayer properly identified one replacement property and on day 65 of the exchange, the building on that property burned to the ground. This would likely meet the high standards of this exception.