When Can You Get Your Money Back in a Failed 1031 Exchange

This is always a difficult issue to address. It creates an immediate conflict between the taxpayer who wants immediate access to his or her 1031 exchange funds and the 1031 Exchange Qualified Intermediary who is trying to comply with IRS Regulations.

The taxpayer who was attempting to complete a 1031 exchange was either not able to identify and/or acquire any like-kind replacement properties in order to successfully complete his or her 1031 exchange transaction.

Therefore, the 1031 exchange fails and the 1031 exchange has not turned into a taxable transaction. The taxpayer demands the return of his or her 1031 exchange funds immediately since the 1031 exchange has now failed and it is now taxable, but the 1031 Exchange Qualified Intermediary refuses to do so. Who is right? What can be done?

The IRS Regulations make it very clear that the taxpayer's 1031 Exchange Qualified Intermediary (Accommodator) can only permit the taxpayer to have access, exercise control over or receive the benefit of his or her 1031 exchange funds under certain circumstances.

The taxpayer does not care because in their view their 1031 exchange has failed and it is taxable regardless of when they receive the funds. The 1031 Exchange Qualified Intermediary does care because they do not want to risk losing their status as a 1031 Exchange Qualified Intermediary and jeopardizing the status of other clients' 1031 exchanges that were successful.

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