This is one of the most common questions asked of a qualified intermediary.The answer: Qualifying property under §1031 must be held by the taxpayer for “productive use in a trade or business, or for investment.” The determination of whether property is held for productive use in a trade or business or for investment is made as of the time of the exchange.
For quite some time, the interaction of §121 (exclusion of gain on the sale of a principle residence) and §1031 (non-recognition of gain or loss in like-kind exchanges) has confused many taxpayers. Fortunately, the Internal Revenue Service has provided clear guidance on this matter with Revenue Procedure 2005-14.
Occasionally, a taxpayer will request the return of his or her exchange proceeds in the middle of a §1031 exchange. But it is important to consider the consequences. For example, a taxpayer could trigger a capital gains liability if he or she identifies multiple replacement properties, acquires one of them, decides not to complete the rest of the exchange, then requests the return of the remaining proceeds from the qualified intermediary (QI).