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How can you secure your qualified intermediary's exchange promise? Some qualified intermediaries have become bankrupt or their employees have absconded with their customers' exchange money. This makes it important to use a financially sound qualified intermediary and to consider securing or guaranteeing the exchange balance. Properly securing your exchange balance is perhaps the most important aspect of a deferred exchange. Your attorney's advice will be important on how to secure the exchange balance.

The tax regulations approve a number of forms of security:

• A mortgage, deed of trust, or other security interest in property (other than cash or cash-like investments),
• A standby letter of credit,
• A guarantee of a third party, or Cash or cash-like investments held in a qualified trust or a qualified escrow. It usually is impractical for your qualified intermediary to give a mortgage or pledge to real property or other property (other than cash or cash-like investments) as security for its exchange obligation.

Standby letters of credit are both complicated and expensive. They are useful only in large exchanges. A standby letter of credit is a commitment by a bank to pay you money if your intermediary fails to live up to its contract to acquire replacement property. You may "draw" on this letter of credit only if your intermediary breaches its agreement to acquire replacement property. It is unclear whether the tax regulations permit the letter of credit to be "drawn" if you never identify replacement property (because you never found replacement property that you want to buy), if there is a cash balance remaining in your exchange account at the end of the 180-day exchange period (because the replacement property was less expensive than the amount remaining in the exchange account), or if your qualified intermediary becomes bankrupt.

Guarantees are an excellent form of security. The guarantor will be responsible for refunding your exchange balance if your qualified intermediary does not. Make sure that you have a reliable guarantor if you are relying on a guarantee.

Tax regulations also permit you to secure your qualified intermediary's promise to acquire replacement property with cash held in a qualified escrow or a qualified trust. These are discussed in the next section.

How can you structure a qualified escrow or a qualified trust? The tax regulations permit you to use a qualified trust or qualified escrow to secure your qualified intermediary's exchange promise. You can then get the money in the qualified trust or qualified escrow if your qualified intermediary fails to acquire your replacement property. It is important that your attorney participate in structuring the qualified escrow or qualified trust.

To structure the qualified escrow,

• your escrow holder must not be you or a "disqualified person," and
• the escrow agreement must limit your rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash or cash-like investments held in the escrow account until the end of the exchange.

Similarly, you can secure your exchange with cash or cash-like investments held in a qualified trust if

• your trustee is not you or a "disqualified person," and
• the trust agreement limits your rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash or cash- like investments held in the trust until the end of the exchange.

When can you receive any remaining cash that you do not invest in replacement property? You may fail to identify any replacement property within the 45-day identification period. You may have cash remaining at the end of the 180-day exchange period. You may identify replacement property but be unable to acquire it. In any of these cases, you will want your cash as soon as possible. The tax regulations tell you when you can "cash out" of the deferred exchange:

• After the end of the 45-day identification period if you have not identified replacement property before the end of the 45- day identification period,
• After you have received all of the replacement property that you have identified, or
• After a "material and substantial contingency" (that you specified in writing to your intermediary in advance) outside your control occurs. Otherwise, you may receive cash after the end the 180-day exchange period.

When you receive this cash, you are taxed on it. You will not have to pay tax on the rest of your exchange.

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