A good way to put your best foot forward in the real estate market is to include an earnest money deposit with your offer. Can it be refunded? Depending on the terms of the purchase agreement. In most cases, this deposit is refundable and signals your commitment to buying the property. Sometimes, however, buyers choose to ‘early release,’ handing it over to the seller for various reasons.
In this section of the article, we will discuss tax-deferred exchanges under IRS Section 1031. It is illegal for a seller/taxpayer to pocket the sale proceeds when selling real estate. It will get you in trouble with the taxman if you do so. Is ‘in receipt’ a legal term? Money is either available immediately, or you can access it immediately if you have it.
Those ‘non-refundable’ deposits in a 1031 exchange have sparked some genuine concern about tax consequences. In this context, let’s address some common questions about managing deposits:
Is it possible to get a tax deferral with a non-refundable deposit? In most cases, yes! During the closing process, the transfer of ownership is crucial. Your earnest money will not be treated as sale proceeds if you enter a 1031 exchange agreement and place it with a qualified intermediary (QI) before closing. It’s taxable if you keep the deposit at closing, however.
Does your QI accept non-refundable deposits for replacement property deposits? Yes, of course. As soon as your QI is designated as the purchaser of the replacement property in the exchange documents, they can fund the deposit. Relinquished properties may also be sold to recoup funds.
Does it make sense to sign a replacement property contract before the resale of the repossessed property? You can, but there’s a catch: you have to close the deal on the relinquished property before you can acquire the replacement property. As a result, a reverse exchange parking arrangement is not necessary.
In the case of a replacement property, what is the refund policy? The QI cannot reimburse the closing agent directly but can use exchange proceeds to replace the deposit. When the closing process is complete, you’ll see your money.
An attorney or tax advisor may be able to help you with your specific situation.
If you’re curious about the 1031 exchange process, our best-in-class advisors at investment.org are ready to assist.