The major premise in permitting the capital gains exception under IRC Section 1031 is eliminating the exchanger from being in Actual or Constructive receipt of the exchange funds, which includes the ability to pledge, borrow or otherwise obtain the benefits of the exchange funds during the exchange period. This rule is in effect from the time the relinquished property is sold and until the replacement property is purchased. The rule is strictly enforced under the Safe Harbor (g)(6) provision of the U.S. Treasury Regulations. Violating this rule can jeopardize ones exchange if not strictly adhered to. By using a qualified intermediary like CR Capital 1031 the exchanger falls within the Safe Harbor provisions and therefore complies with the regulations. CR Capital 1031 safeguards the exchange funds by securing them in a separate bank account for the benefit of the exchanger until the funds are used to purchase the exchanger’s replacement property.
The IRS states that “taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable.” The best way to avoid premature receipt of cash or other proceeds is to use a Qualified Intermediary like CR Capital 1031 to hold proceeds until the exchange is complete.