CAN MY BANK HOLD THE EXCHANGE FUNDS?

The answer is :   It's not a real good idea to have your bank as the depository of the relinquished funds.  One of the major rules in Section 1031 Exchanges is the requirement that the taxpayer not control the funds received from the sale of the relinquished property.   

That is why I continuously point out to questioners that your Qualified Intermediary should be someone completely independent.   There are numerous cases pointing out where taxpayers had in the eyes of IRS, control over the proceeds and therefore were denied the use of Section 1031.   Your bank is just one example of someone you could have control over.   The safest way not to be in violation of this rule is to make sure that you DO NOT have the proceeds held by your Attorney, CPA, Realtor, Bank, Relative, Friend or Acquaintance.  That is another reason why QI's(Qualified Intermediary's) are used.   Qualified Intermediaries are independent and  help ensure that the taxpayer has met all of the safe harbor requirements.

Comments

[Stephen Wayner]

There is no problem with having the initial deposit held by your attorney, but all funds received from the closing must be immediately transferred to the Qualified Intermediary at time of closing in order to not violate the Section 1031 rules.

[Stephen Wayner]

You should never have your own bank hold the funds--the reason is IRS will assume you have control over the funds--that is one of the MAJOR mistakes made by investors and those with a little knowledge of the Section 1031 laws. You were astute enough to ask so that you won't make that mistake.

[John P. McLane]

Is there a problem with the initial deposit on a Contract for sale of the reliquished property being initially deposited in an attorney's IOLA Escrow Account and then turned over to the qualified intermediary when the Exchange Contract is executed?