Rule #4 of my six basic rules for 1031 exchanges is you can not touch the money between the sale of your Old Property and the purchase of your New Property.

IRS law requires that you use an independent third party (called a Qualified Intermediary) to handle your exchange. At least that's the general rule. When you're dealing with the IRS, there are usually exceptions to the rules, and such is the case with this rule. Being aware of this exception can save you the cost of an intermediary, which runs at least $500 in most parts of the country.

Section 1031 requires the use of a Qualified Intermediary only if you can not sell your Old Property and buy your New in a simultaneous closing. A simultaneous closing is easy if you are trading properties with your buyer. For example, Fred and Sue are trading their purple duplex to Sam Seller in exchange for his red office building. Both properties are worth $100,000. At the closing Fred and Sue give Sam the deed for the duplex, and he gives them the deed to his office building. A Qualified Intermediary is not required for this transaction.

Rarely will you be able to find a buyer for your property who also happens to own your ideal replacement property. Typically, you have a buyer for your property and then find your replacement property. But you can still take advantage of this rule if you make both closings simultaneous. So how do you make two completely separate closing simultaneous? Well, the IRS defines a simultaneous closing as closings using the same title or escrow office on the same day.

In light of this, let's say Sam Seller decides NOT to buy Fred and Sue's purple duplex. Instead, Fred and Sue decide to sell their purple duplex to Bob Buyer, and then purchase Sam Sellers red office building. This is two separate closings, so if Fred and Sue want to save themselves the intermediary fee, they'll have to hold both closings at the same title/escrow office on the same day. Typically they would sell the duplex to Bob in the morning, and then purchase the office building from Sam in the afternoon.

In many parts of the country, real estate closings are handled by title or escrow companies with multiple offices. The same office means exactly that: the same office -- it does not mean different offices of the same title company. Several years ago, we were asked to represent a taxpayer that had sold a property in one state, and closed the purchase of the new property on the same day, with the same title company, but in a different state. The IRS was disallowing his exchange, and he asked us for help. We advised him to settle with the IRS because he had no chance of winning.

And same day means the very same day; you don't get excused even if you have no control over the events that caused your purchase to get pushed to the next day. This means that if Sam Seller, in Fred and Sue's example above, is incapacitated by a car accident on the way to the closing of Fred and Sue's New Property, their exchange will be toast. For this reason, taxpayers will often retain an intermediary, at reduced fees, to prepare protective exchange documents in case something goes wrong. If you do this, the protective documents must be prepared and signed before the closing of the sale of the Old Property.

A few years ago one of our clients retained us to prepare protective documents on a simultaneous closing, and it's a good thing that he did! The closing of his Old Property in the morning went off without a hitch, but at the closing of the purchase of the New Property in the afternoon, the seller had an emotional breakdown and was unable to close. It turns out that the property was a lovely home in the mountains with spectacular views. The seller's mother had come to live with them several years earlier, and the mother had come to love the property, with the views and the deer and other wildlife. When Mom died, in accordance with her will, her ashes were scattered on the property. At the closing the seller confronted the fact that this wasn't just selling the house, it was also selling Mom! While the closing did not happen until the next day, it turned out all right because our protective documents were in place.

While simultaneous closings can save a few hundred dollars in exchange fees, an investor stands to lose a whole lot more than that if anything should go wrong. A prudent investor will always consult with a Qualified Intermediary regardless, just in case.

Published: April 3, 2007

Use of this article without permission is a violation of federal copyright laws.

Gary Gorman is a retired CPA who has taught national tax classes for both Arthur Andersen & Co. and for Price Waterhouse & Co. and numerous undergraduate tax classes at Oregon State University. Since 1994 he has educated realtors, investors, CPAs and attorneys throughout the United States and Mexico on the intricacies of 1031 Exchanges. As the author of the best selling 1031 book Exchanging Up! and a co-author with Rich Dad/Poor Dad and Donald Trump, Gary is considered one of the Nation's leading 1031 Experts. Gary is the owner and managing partner of the national firm, 1031 Exchange Experts, LLC, which headquarters is located in Denver, Colorado, and offices in Arizona, Connecticut, Florida, Hawaii, and Texas. His firm is commited to securely holding client funds in separate, segregated accounts which clients can monitor through our affiliate banks' website. As a Qualified Intermediary, Gary has been involved in more than 30,000 1031 Exchange transactions since 1994. Contact him at , visit his website at expert1031.com, or call 866-694-0204.