The 1031 Exchange Process
An exchange is rarely a simultaneous swap of properties between two parties. Most exchanges, whether they are simultaneous or delayed involve three parties: the investor (exchanger) who is doing the exchange, the buyer who is purchasing the exchanger’s old (relinquished) property and the seller who is selling the exchanger a new (replacement) property.
To create the tax-free exchange of property and to obtain the benefit of the deferral of income taxes, most prudent exchangers use the services of a Qualified Intermediary such as Title Resources Exchange Company and the Qualified Intermediary becomes a fourth party principal in both simultaneous and delayed exchanges. By placing the proceeds from the sale of property in the hands of a Qualified Intermediary, the exchange avoids taxation on the sale of the property as the sales proceeds are not actively or continuously received by the exchanger.
The steps for completing an exchange with TREXCO are relatively simple:
- The exchanger signs a contract to sell a relinquished property to the buyer.
- TREXCO and the exchanger entering into the exchange agreement to retain TREXCO as a qualified intermediary and the exchanger assigns the exchanger’s rights in the sales contract to TREXCO including the right to receive the exchange funds.
- At the closing of the sale of the relinquished property the exchange funds are wired to TREXCO and TREXCO instructs the settlement officer to transfer the deed directly from the exchanger to the buyer.
- Unless the exchanger can acquire all replacement property within the first 45 days from the close of the sale of the relinquished property, the exchanger must identify possible replacement properties in writing to TREXCO within the 45-day identification period.
- The exchanger has a maximum of 180 days in the exchange from the date of the sale of the relinquished party to acquire all replacement property.
- Once the exchanger identifies the replacement property, the exchanger will enter into a contract to purchase a replacement property with a seller. The exchanger will assign the exchangers rights in the purchase contract to TREXCO.
- At the closing of the purchase of the replacement property, TREXCO will wire the exchange funds to complete the exchange and TREXCO instructs the settlement officer to transfer the deed directly from the seller to the exchanger.
Sample Cooperation Clause for the Sale Contract
Buyer hereby acknowledges it is the intent of the seller to effect a 1031 tax-deferred exchange which will not delay the closing or cause additional expense to the Buyer. The sellers rights under this agreement may be assigned to TREXCO, “A Qualified Intermediary”, for the purpose of completing such an exchange. (Switch buyer and seller in the corporation clause for the purchase contract.)