1031 Exchange FAQ - AGREEMENT

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Common 1031 Exchange Questions

How do I figure out if the property I am trying to sell Qualifies for 1031 Exchange?

Can I 1031 Exchange a rental property for a motor home?

In a 1031 Exchange, can I have a gain even if I don't have any boot?

In a 1031 Exchange, what is the difference between land held for sale and land held for investment?

What is un-like 1031 Exchange exchange boot?

Do I need to change my purchase and sale agreements to conduct a 1031 exchange?

No. The decision to sell your property as a 1031 exchange is yours alone. Realty Exchangers will supply you with an Assignment of Purchase and Sale agreement which must be signed by both parties. This agreement stipulates that Realty Exchangers is your Qualified Intermediary and you are assigning us contract rights in your behalf for the property. We will contact your Title/Closing Agent and inform them that we are your Qualified Intermediary and will supply them with the documents necessary to close sale on your property.

Related Info: conduct, agreements, sale, purchase, change, supply, agreement, exchangers, realty, rights


Does the 1031 exchange have to be included in the purchase agreement?

Normally, in a 1031 Exchange, we encourage tax payers to use the following clause in their Purchase and Sale agreements.

"Buyer hereby acknowledges it is the intention of Sellers to complete a deferred exchange and qualify for treatment under Internal Revenue Code Section 1031. This exchange will not delay the closing (of escrow) or cause additional expense to Buyer. Seller's rights and obligations under this agreement may be assigned to a Qualified Intermediary (as defined in IRS Regulation 1.1031(k)-1) of Seller's choice for the purpose of completing the exchange. Buyer agrees to cooperate with Seller and the Qualified Intermediary in a manner necessary to complete this exchange."

However, in situations where time is of the essence a suggested clause that the deal is a 1031 Exchange doesn't necessarily have to be included in the purchase and sale agreement. The Seller providing the Closing company with the documents necessary to convert the sale to an exchange (these are supplied by the Qualified Intermediary) is sufficient.

Related Info: agreement, purchase, included, sale, buyer, complete, seller, closing


What is a 1031 Exchange Bank Escrow Agreement?

An issue of late surrounding 1031 Exchange is increased security of 1031 Exchange funds.

The only real protection in a 1031 Exchange, (besides FDIC insurance) is a QUALIFIED ESCROW agreement. This is a separate signed agreement between you, Realty Exchangers, and the bank, which requires you to approve in writing any withdrawal of your 1031 Exchange funds. At the same time it keeps control of the 1031 funds with Realty Exchangers, Inc. thereby meeting the IRS's 1031 Exchange requirements. ALL OF REALTY EXCHANGERS 1031 EXCHANGE ACCOUNTS INCLUDE A QUALIFIED ESCROW agreement!

The Qualified Escrow agreement is signed by all parties at the time of closing of the relinquished property. When the 1031 funds are wired into Realty Exchangers account the bank places a hold on the account. Then when the exchanger is ready to close on the replacement property a form is signed by the exchanger (you) that authorizes the bank to release the specified amount to that escrow as requested by Realty Exchangers wiring instructions. Quite simply, the exchanger will have to authorize any use of their 1031 funds.

Related Info: agreement, escrow, bank, exchangers, funds, realty, exchanger


What is an Earnest Money Clause?

We recommend that you insert following clause into your Purchase & Sale agreement. This way all parties know that the transaction will be a 1031 exchange, and there will be no lack of disclosure which may obstruct the transaction. (This is merely a suggestion, and is not required by the "1031" regulations )

"A material part of this transaction is the successful completion of an I.R.S. Code Section 1031 deferred exchange. "Buyer/Seller" agrees to cooperate with the "Exchanger" (note: insert the full name of the party doing the exchange in place of the word "Exchanger") in signing those documents necessary to complete the exchange, provided that "Buyer/Seller" shall incur no additional costs or liabilities in excess of those which would have occurred had this been an outright "purchase/sale," and not an exchange."

Related Info: clause, money, earnest, transaction, exchanger, buyer/seller, insert, word, signing


When my qualified Intermediary holds my funds, how safe are they?

Given todays economic climate, we can think of no better question to ask. You should know that as your 1031 Exchange Qualified Intermediary, Realty Exchangers takes the safety and security of your funds very seriously.

For over 20 years now the safety of client proceeds has been of prime importance to us and here's what we've done about it.

The two most important areas of concern are:

1. The Bank where client funds are deposited.
2. The Qualified Intermediary.

1.) The Bank: Although our bank is considered strong and very well capitalized the only real safety for bank accounts today is "FDIC" (Federal Deposit Insurance Corporation) insurance. Our bank, Riverview Community Bank of Vancouver Washington, has qualified for the FDIC's Transaction Account Guarantee Program and ALL OF REALTY EXCHANGERS ACCOUNTS ARE "FDIC" INSURED. Unlike previous "FDIC" insurance there is no upper limit on the amount.

2.) The Qualified Intermediary: Our company is Licensed, Insured, and Bonded but the only real protection is a QUALIFIED ESCROW agreement. This is a separate signed agreement between you, us, and the bank, which requires you to approve in writing any withdrawal of your 1031 funds. At the same time it keeps control of the 1031 funds with Realty Exchangers, Inc. thereby meeting the IRS's §1031 requirements (see note below). Unless otherwise requested ALL EXCHANGE ACCOUNTS WILL NOW INCLUDE A QUALIFIED ESCROW agreement.

Note: The Qualified Escrow agreement is signed by all parties at the time of closing of the relinquished property. When the 1031 funds are wired into Realty Exchangers account the bank places a hold on the account. Then when the exchanger is ready to close on the replacement property a form is signed by the exchanger (you) that authorizes the bank to release the specified amount to that escrow as requested by Realty Exchangers wiring instructions. Quite simply, the exchanger will have to authorize any use of their 1031 funds.

We want you to feel secure and able to devote your full attention to the structure and completion of your 1031 exchange knowing that your funds will be there when you need them.

Related Info: safe, funds, holds, bank, realty, exchangers, escrow, agreement


Why does the Qualified Intermediary have to hold the proceeds from my 1031 Exchange? Why can't my Title Escrow Company?

The biggest issue here is to avoid "constructive receipt" of your proceeds, which is why you should NOT keep money or other property during the transaction. If you receive the entire cash proceeds from your 1031 Exchange or are in control of those funds in any way, you will not qualify for §1031 treatment.  You must overcome the doctrine of " constructive" receipt. The general rules concerning actual and constructive receipt apply to determine if you are in actual or constructive receipt of money or other property before you actually receive like-kind Replacement Property.
You are in actual receipt of money or property at the time you actually receive the money or property. You are also treated as being in receipt if you receive the economic benefit of the money or property. You are in constructive receipt of money or property at the time the money or property is credited to your account, set apart for you, or otherwise made available to you so you may draw upon it at any time. Or if you can draw upon it if notice of intention to withdraw is given. In addition, actual or constructive receipt of money or property by your agent is actual or constructive receipt by you.

The 1031 exchange Regulation provides a "safe harbor" that permits you to sell your Relinquished Property and acquire Replacement Property and avoid constructive receipt. This safe harbor is your written contractual agreement with a Qualified Intermediary.

Related Info: company, escrow, title, proceeds, receipt, money, constructive, actual, receive, time


How do I 1031 Exchange a duplex when I live in one of the units?

A 1031 Exchange of a rental property qualifies under the Real Estate Held for Business use provision of the IRS's 1031 Exchange Statue. Whether you live in one the units doesn't matter in terms of qualifying for a 1031 exchange. What is important is that you get help from your CPA or Tax Attorney when writing the Purchase and Sale agreement with your buyer. A lot of this depends on how your property is deeded. If each unit is deeded separately, this is a no-brainer. If they are all under the same deed, you will need to do some additional wrangling in order to split out the deeds. But, yes, 1031 Exchanging a duplex is possible even if you are living in one of the units. We encourage you to discuss this with your CPA or Attorney for more information.

Related Info: units, live, duplex, deeded, attorney, discuss, deed, additional


I need to change my identified replacement properties. How do I do that?

The Identification of 1031 Exchange replacement properties can be revoked as long as it is done within the 45-day identification period. This revocation must be done in writing and should include a rescission of a purchase and sale agreement, if one was written. The next step would be to write a new Identification letter that includes the properties you intend to close sale on before the 45 day deadline is reached.

Related Info: properties, replacement, identified, change, identification, sale, letter, agreement, includes


How do I handle the earnest money deposit for the purchase of my 1031 Exchange Replacement Property?

We recommend using your own personal funds for earnest money deposits. Any unused funds brought into the 1031 Exchange replacement property transaction, other than the exchange proceeds being held by your QI can be reimbursed at the time of closing. Exchange proceeds can only be used for earnest money if the purchase and sale agreement has been assigned in writing to your QI And even then they are not true earnest money as the funds can only be released to the seller at the time of closing. If the transaction fails to close the funds will be returned to your QI.

Related Info: replacement, purchase, deposit, money, earnest, funds, transaction, time, closing


How do I do a 1031 Exchange?

We've been reading countless daily internet articles explaining the benefits and the whys of an IRS 1031 Exchange. The reasons why someone should do a 1031 Exchange are quite simple, the taxpayer wants to defer their capital gains tax. But what about how? How do you do a 1031 Exchange?

1. Own Qualified Real Estate.

Make sure you have real estate that qualifies for 1031 Exchange. Make sure you or your business owns either investment real estate, such as land. Or, real estate held for business use, such as a rental property or an office complex. Careful consideration of your property must be taken into account. Do not be fooled by individuals telling you you can 1031 Exchange your primary residence or property you purchased yesterday with the intent to flip tomorrow. This is a horrible trap. Consult your CPA for more information.

2. Find a buyer

Realty Exchangers has two very popular venues for finding buyers of your property and finding 1031 Exchange pros who know how to make all happen. Visit our 1031 Exchange Property Search Engine to find looking at http://www.exchangersclearinghouse.com. You can also look up a local professional with our 1031 Exchange Pro Directory located at http://www.realtyexchangers.com/1031_Exchange/index.html. Both of these services are free!

3. Accept the and write up a purchase and sale agreement.

Work with your buyer and attorney to make sure all parties are happy with the offer and that all contingencies are considered. Be sure to inform the buyer that this is a 1031 Exchange.

4. Contact a closing company.

Finding the right closing/title company can be a chore. Your attorney or real estate agent may have some ideas of which closing company to use, better to find one that knows how to handle 1031 Exchanges.

5. Setup a 1031 Exchange with a Qualified Intermediary. (QI)

Choosing your 1031 Exchange QI is important. You need one with experience and integrity. Realty Exchangers has been providing 1031 Exchange QI services since 1989. In over 20 years, we helped thousands of tax payers defer their capital gains tax. We are the experts at making the transaction simple and easy.

6. Close sale on your property and transfer your proceeds into your QI's trust.

When you sale closes, you closing company is directed to transfer the proceeds from your 1031 exchange into your QI's trust account. Here the funds will sit while you search for your 1031 Exchange Replacement Property.

7. Know your 45 day and 180 day deadlines.

Soon as the sale closes on your Relinquished Property the clock starts ticking on securing qualified Replacement Properties.

45 day Identification Period. The IRS stipulates that you have 45 days to officially "Identify" your replacement properties. This must be done in writing and Realty Exchangers provides you with the forms necessary.
180 Closing Deadline. The IRS also stipulates that you have 180 to close sale on ALL of your identified replacement properties.

8. Identify your Replacement Properties.

Use the same web site tools mentioned in number 2 above. These must be of like-kind, meaning they must follow the same qualifications test as mention in step 1. The number of Replacement Properties you can chose, depends on which rules you want to follow. The 3 property rule, the 200% rule or the 95% rule. The most popular is the 3 property rule because it is the easiest for most people to understand.

9. Close on your Replacement Properties.

Essentially, this step is the same as steps 3 and 4, mentioned above.

That is all there is to it.

Realty Exchangers takes pride in keeping this process as clean and simple as possible. Only when you attempt to circumvent the above steps do you invite trouble with your 1031 Exchange. You have two options with the IRS. Pass or Fail. If you follow the rules, your Exchange will pass and you will defer your capital gains. Failure to follow the rules or attempts to circumvent the process creates issues that can force your Exchange to collapse.

And always, if  you have questions, the best option is to call Realty Exchangers at 800-570-1031.

Related Info: , replacement, properties, estate, exchangers, sale, real


Can I 1031 Exchange a property that I already sold and purchased?

1031 Exchange only works with real estate properties for which you have not closed sale. This is why timing is so important. If you have already written your purchase and sale agreement on some business or investment property that you own and are now beginning to work toward a closing with a Title/Closing Company or an attorney, NOW is the time to start your 1031 Exchange, waiting until after you close sale is TOO LATE!

Related Info: purchased, sale, title/closing, closing, work, company, attorney


When Does a 1031 Exchange Sale Take Place?

The timing of the sale is a key factor. Gain or loss to the seller is not realized until the transaction has been closed. In a 1031 exchange transaction, the Identification or the Exchange Time Periods do not start to run until the transaction has been closed. In some instances, the sale might be held to have happened on an earlier date than the taxpayer believed. This could be fatal to a 1031 exchange since the Time Periods would be expired. That's why it's important to understand the rules determining "date of sale".



A sale is considered closed on the day the buyer's right to receive the property is unqualifiedly established. This usually takes place upon delivery of the deed even though actual possession by the buyer may take place later. However, it is not necessary for title to pass for a sale to take place taxwise.

For tax purposes, a closed transaction also results from a contract of sale, which is absolute and unconditional on the part of the seller to deliver a deed to the buyer upon payment of the consideration, and the buyer has the right to secure possession and to exercise all the rights of ownership.

Here is the IRS position: A sale occurs when the deed passes or when the buyer has the right of possession and the economic burdens and benefits of ownership are transferred to the buyer - whichever occurs first.

Here is an illustration of how this rule caught an unsuspecting taxpayer right in the wallet. The Awalts lost the tax-free rollover on the sale of their old house because more than 2 years went by before they bought their replacement residence. [Caution: This 2-year rollover rule has now been repealed.] Here's what happened.

The Court did not accept Awalt's contention that the sale of their old residence took place on the later date - day the legal title was transferred. The Court held the actual sale took place at an earlier date - the day the burdens and benefits of ownership shifted to the buyers. This took place on the day the agreement of sale was executed. Since this earlier date was more than 2 years before the Awalts bought their replacement residence, the tax-free exchange benefits of Section 1034 were denied them.

An agreement to sell is not a sale even if part payment is made in cash at the time the agreement is signed.

Related Info: sale, buyer, date, transaction, closed, possession


Can I 1031 Exchange my portion of a property that my business partners are selling?

If you are part of a partnership that owns 1031 Exchange property such as business real estate (like an apartment building) or real estate held for investment (like a parcel of land) and the partners have decided to sell, you can 1031 Exchange your ownership into another qualifying property, even if the other partners have decided to do something else with proceeds.

Be sure to enter into 1031 exchange agreement with a Qualified Intermediary prior to the sale and have your proceeds proceeds paid into the QI's trust account.

Related Info: selling, partners, business, portion, proceeds, decided, estate, real, agreement


Can I 1031 Exchange a piece of land that I own for a commercial building that I'm already occupying for my business?

We want to be sure we understand your question. You own a piece of land and you want to purchase a commercial building that your business currently occupies. If you are planning to do this 1031 exchange as a transaction, the answer is Yes, you can do a 1031 Exchange. However, if you aren't planning a transaction here then the answer is no. For all 1031 Exchanges, there must be a transaction with a purchase and sale agreement and a title transfer.

Related Info: business, occupying, building, commercial, land, transaction, planning, purchase, sale, exchanges, agreement


Soon as I buy my 1031 Exchange Replacement Property, how long do I have to hold it before I can 1031 exchange it again?

The IRS code and 1031 exchange regulations are silent on the issue of time held. You must be able to show and take the position that the decision to exchange after your acquisition was not related to or a contingent part of the original acquisition. In other words, if there is any written evidence what-so-ever such as agreements, deposits or any other record showing intent to exchange the property once acquired, the proposed exchange of the property is dead - there is no way to qualify property acquired for resale.

To help, here is an excerpt from our 1031 exchange book. Notice in the example, the taxpayer attempted to qualify the property by holding it for a period of time as rental income property. The option was fatal to the exchange since it recorded the taxpayer's mind and intent at the time of the exchange. Even though the circumstances are somewhat different, the same rules still apply.

The step transaction doctrine embodies a general requirement that all steps, which are an integral part of the exchange, will be considered in determining the proper tax treatment for the exchange. The step doctrine may be applied by the IRS if

there was a pre-existing binding commitment to take each of the steps at the time the transaction was commenced, and
the steps were functionally interdependent in the sense the earlier step would have been unproductive without the later steps.

The step transaction doctrine may also apply if all the steps, although functionally independent, were contemplated at the outset of the 1031 exchange.

Example: You find a choice apartment house property for sale. You know of a buyer who would be willing to pay top dollar for the property. You decide to acquire the property and sell the buyer a two-year option to buy the property. In the meantime you will operate it as a rental income property. You currently own a commercial property you want to sell now but your accountant advises you need another capital gain this year like you need a hole in your head.

You enter into an exchange agreement to sell your commercial property and acquire the choice apartment house with the plan of selling the option, operating the property until the option is exercised, and taking your total gain in that taxable year.

The exchange will be disallowed and treated as a sale. Not only does the step transaction doctrine apply and collapse the exchange but also the act of selling the option at time of acquisition reclassifies the rental property as real estate held for sale in the ordinary course of business.

Related Info: replacement, time, option, steps, doctrine, transaction, sale


I want to do a 1031 Exchange but don't understand why I cannot hold the funds in my bank?

The secret of a successful 1031 exchange is to avoid holding the money or other property during the transaction. If you receive cash proceeds during your 1031 exchange, you will not qualify for the capital gains deferment. While this sounds easy to avoid, it's not. You must overcome the doctrine of " constructive" receipt. The general rules concerning actual and constructive receipt apply to determine if you are in actual or constructive receipt of money or other property before you actually receive like-kind Replacement Property.

You are also treated as being in receipt if you receive the economic benefit of the money or property. You are in constructive receipt of money or property at the time the money or property is credited to your account, set apart for you, or otherwise made available to you so you may draw upon it at any time. Or if you can draw upon it if notice of intention to withdraw is given. In addition, actual or constructive receipt of money or property by your agent is actual or constructive receipt by you.

The deferred exchange Regulation provides a "safe harbor" that permits you to sell your Relinquished Property and acquire Replacement Property and avoid constructive receipt. This safe harbor is your written contractual agreement with a Qualified Intermediary.

Related Info: bank, funds, receipt, constructive, money, actual, receive, time


How secure are my 1031 Exchange funds?

The security of your funds is not something you should have to worry about while completing your 1031 Exchange. For over 20 years now the safety of client proceeds is of highest importance to us.  Here's what we're doing about it.

There are two primary areas of concern:

1. The Bank where client funds are deposited (Riverview Community Bank).
2. The Qualified Intermediary (Realty Exchangers, Inc.).

1.) The Bank: Although our bank is considered strong and very well capitalized the only real safety for bank accounts today is "FDIC" (Federal Deposit Insurance Corporation) insurance. Riverview has qualified for the FDIC's Transaction Account Guarantee Program and ALL OF REALTY EXCHANGERS ACCOUNTS ARE NOW "FDIC" INSURED. Unlike previous "FDIC" insurance there is no upper limit on the amount.

2.) The Qualified Intermediary: As we have seen, with all the recent bankruptcies and business failures, neither size, a prestigious name, belonging to a trade group, or hiding behind a title company or other large entity, will assure the safety of your funds. We are Licensed, Insured, and Bonded but none of that will really protect you either. The only real protection is a QUALIFIED ESCROW agreement. This is a separate signed agreement between you, us, and the bank, which requires you to approve in writing any withdrawal of your 1031 funds. At the same time it keeps control of the 1031 funds with Realty Exchangers, Inc. thereby meeting the IRS's §1031 requirements (see note below). Unless otherwise requested ALL EXCHANGE ACCOUNTS WILL NOW INCLUDE A QUALIFIED ESCROW agreement.

Note: The Qualified Escrow agreement is signed by all parties at the time of closing of the relinquished property. When the 1031 funds are wired into Realty Exchangers account the bank places a hold on the account. Then when the exchanger is ready to close on the replacement property a form is signed by the exchanger (you) that authorizes the bank to release the specified amount to that escrow as requested by Realty Exchangers wiring instructions. Quite simply, the exchanger will have to authorize any use of their 1031 funds.

We want you to feel secure and able to devote your full attention to the structure and completion of your 1031 exchange knowing that your funds will be there when you need them.

Related Info: funds, secure, bank, realty, exchangers, escrow, agreement


What is a 1031 Exchange Qualified Intermediary?

A Qualified Intermediary is a person (or company) who, for a fee, acts to facilitate the 1031 exchange by entering into an agreement with you for the exchange of properties.

An intermediary is treated as acquiring and transferring property if:

The intermediary acquires and transfers legal title to that property.
The intermediary (either on its own behalf or as the agent of any party to the transaction) enters into an agreement with a person other than the exchanger for the transfer of the Relinquished Property to that person. Under the agreement, the intermediary transfers the Relinquished Property to that person.
The intermediary (either on its own behalf or as the agent of any party to the transaction) enters into an agreement with the owner of the Replacement Property for the transfer of that property. Under the agreement, the intermediary transfers the Replacement Property to the exchanger. Solely for these purposes, the intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer of property.

The exchanger or a disqualified person cannot qualify as qualified intermediaries for their own exchange. A person or company is NOT a Qualified Intermediary IF:

The person is an agent of the exchanger at the time of the transaction.
The person and the exchanger bear a relationship described in Section 267(b) or Section 707(b). However, you must substitute “10 percent” for “50 percent” each time it appears in those Sections.
The person and a person who is an agent of the Exchanger at the time of the transaction bear a relationship described in (2) above.

These people are treated as agents of the exchanger: A person who has acted as the exchanger’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties. However, the regulation disregards certain services for purposes of determining if an agency relationship exists. Performance of services with respect to exchanges of real estate intended to qualify under §1031 is not taken into account.

Furthermore, performance of routine financial, title insurance, escrow, trust services by a financial institution, title insurance company, or escrow company is not taken into account.

Here are some examples to illustrate the disqualified person definition. In all examples, Exchanger enters into an exchange agreement with Jones to retain Jones to facilitate an exchange of real property Happy Acres.

Jones is Exchanger’s accountant and has rendered accounting services other than with respect to §1031 exchanges of property to Exchanger within the 2-year period ending on May 17, 1991. Jones is a disqualified person. If Jones had not acted as Exchanger’s accountant within the 2-year period ending May 17, 1991 or if Jones had acted as Exchanger’s accountant within that period only with respect to Section 1031 exchanges, Jones would not be a disqualified person.

Jones is engaged in the business of acting as an intermediary to facilitate deferred exchanges. Jones is a wholly owned subsidiary of an escrow company that has performed routine escrow services for Exchanger in the past. Jones has previously been retained by Exchanger to act as an intermediary in prior §1031 exchanges. Jones is not a disqualified person notwithstanding the intermediary services previously provided by Jones to Exchanger and notwithstanding the combination of Jones’s relationship to the escrow company and the escrow services previously provided by the escrow company to Exchanger.

Jones, Inc. is a corporation only engaged in the business of acting as an intermediary to facilitate deferred exchanges. Each of 10 law firms own 10 percent of the outstanding stock of Jones, Inc. One of the 10 law firms that own 10 percent of Jones, Inc. is Mason and Mason. Eileen is the managing partner of Mason and Mason and is the president of Jones, Inc. Eileen, in her capacity as a partner in Mason and Mason, has also rendered legal advice to Exchanger within the 2-year period ending on May 17, 1991, on matters other than §1031 exchanges.

Eileen and Mason and Mason are disqualified persons. Jones, Inc., however, is not a disqualified person because neither Eileen or Mason and Mason own, directly or indirectly, more than 10 percent of the stock of Jones, Inc. Eileen’s participation in the management of Jones, Inc. does not make her a disqualified person.

Here’s a transaction where everything went wrong. It’s an excellent example of why an exchanger should retain the services of a good Qualified Intermediary and tax advisor before entering into a §1031 exchange. Especially one involving related taxpayers.

In FSA (Field Service Advice) 200048021, the IRS said a father who sold his property to his children couldn’t qualify for nonrecognition of gain under §1031(a) on the exchange of his property for an interest in another property.

Here’s what happened—the father wanted to sell his property to his four children. They drew up an exchange agreement for a like-kind exchange, but failed to identify the property being exchanged. The father then deeded the property to the children, and the children executed a promissory note designating their father as the lender and another individual as the escrow agent. The children did not own any replacement property, so the father located it for them. Only then did the father then contacted a Qualified Intermediary for the exchange.

In the meantime however, the father actually received the deed to the property directly from the owner. The children later sold small portions of the property they received from their father to unrelated third parties. The IRS said the father was not entitled to the benefits of §1031.

First, the escrow agent didn't satisfy the definition of a Qualified Intermediary. Second, the father failed to unambiguously identify the replacement property. Third, the father was in constructive receipt of the proceeds from the sale of his relinquished property before receiving his replacement property. This violated the constructive receipt rules since the father never did use the safe harbor rules available from a Qualified Intermediary.

The IRS said the father's transfer to his children did not even qualify as a §1031 exchange at all, even as an exchange between related persons because the father did not exchange property with his children, but rather sold property to them.

Related Info: , jones, person, exchanger, father, agreement, mason


How do I write a "Cooperation Clause" for the 1031 Exchange property I am selling?

Here is a "cooperation clause" that you can have added to the purchase and sale agreement for the sale of your 1031 Exchange Relinquished Property.

Buyer hereby acknowledges it is the intention of Sellers to complete a deferred exchange and qualify for treatment under Internal Revenue Code Section 1031. This exchange will not delay the closing (of escrow) or cause additional expense to Buyer. Seller's rights and obligations under this agreement may be assigned to a Qualified Intermediary (as defined in IRS Regulation 1.1031(k)-1) of Seller's choice for the purpose of completing the exchange. Buyer agrees to cooperate with Seller and the Qualified Intermediary in a manner necessary to complete this exchange.

Related Info: selling, clause, cooperation, buyer, complete, sale, agreement, seller's, defined


When should I start my 1031 Exchange?

Great question! Like much in life, timing your 1031 Exchange is critical.

The best time to start your 1031 is after you written a purchase and sale agreement with the buyer of your property, determined the property you are selling qualifies for 1031 Exchange and that you will have capital gain which you wish to defer. Soon as you are ready, contact your Qualified Intermediary with the contact information of person or company handling the closing of the sale and your QI should do the rest.

Related Info: start, sale, ready, defer, gain, capital, information






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