1031 Exchange Services
TREXCO provides qualified intermediary services to facilitate Section 1031 exchanges, reverse exchanges and construction exchanges. The firm has handled a number of exchange proceeds on a local, state and national level. We offer our clients the highest degree of integrity, professionalism and efficiency, at a price well below that charged by the national exchange companies.
The Forward Exchange Process
In order to initiate a deferred exchange, a property owner should appoint a qualified intermediary. The intermediary will prepare several instruments required to document the exchange, including the following:
- Exchange Agreement – This agreement outlines the rights and obligations of the parties involved in the exchange.
- Assignment of Rights and Notification – Relinquished Property Contract – This agreement assigns the property owner’s interest in the contract, which entitles the intermediary to receive and hold the net proceeds from the pending sale.
- Notice, Waiver and Release – This document outlines the time deadlines and client obligations during the exchange process.
- W-9 Form – This form allows the intermediary to invest the sales proceeds in an account on behalf of the client.
- Identification of Replacement Property – This document should be completed by the exchanger when identifying the replacement property that will be purchased.
Once these documents have been completely executed, the intermediary will notify the title company handling the closing of the sale. The title company will close the transaction in the usual fashion. All legal documents, including the Warranty Deed, will be executed by the property owner, and given to the buyer (called “direct deeding”).
Once the transaction closes and the intermediary receives the net sales proceeds, the proceeds will be invested by the intermediary in an interest bearing account on behalf of the client. The client will receive all interest that accrues on the account during the pendency of the exchange.
After the closing of the initial sale, the client has 45 days to identify the replacement property. At this time, the client will execute the Identification of Replacement Property paperwork. The client has 180 days from the date of the sale of the first property to complete the purchase of the replacement property.
At the time of closing of the replacement property, the intermediary will turn over to the title company all funds held by it from the initial sale to be applied toward the purchase price.
Section 1031 Reverse Exchanges
A Section 1031 Reverse Exchange is appropriate when a client needs or desires to purchase replacement property before the property to be relinquished is sold.
The Reverse Exchange Process
In order to initiate a reverse exchange, the client desiring to complete the exchange must appoint an Exchange Accommodation Titleholder (EAT) and execute several instruments required to document the exchange, including:
- Qualified Exchange Accommodation Agreement – This agreement outlines the parties’ rights and obligations and the nature of the exchange.
- Assignment of Rights and Notification – Replacement Property – This agreement assigns the purchaser’s interest in the contract to the EAT and entitles the EAT to purchase property and obtain the title pending the sale of the relinquished property.
- Reverse Exchange Waiver and Release – This form outlines the time deadlines and client obligations in the reverse exchange process.
- Identification of Relinquished Property – This document identifies the property to be sold to complete the reverse exchange.
Typically, the client will arrange for financing, either through a third party lender or through the seller, to facilitate the EAT’s purchase of the replacement property. The lender will normally require the following documents at closing:
- Nonrecourse Real Estate Lien Note executed by the EAT;
- Nonrecourse Deed of Trust executed by the EAT;
- Guaranty Agreement executed by the client;
- Lease Agreement or Management Agreement executed by the EAT and the client;
- Settlement Statement executed by the EAT and approved by the client.
The reverse exchange procedures require the client to identify potential relinquished property to be sold to complete the exchange within 45 days from the transfer of the replacement property. Once the relinquished property has been identified. TREXCO Exchange, as the Qualified Intermediary, will close on the sale of the relinquished property and receive the net proceeds derived from the sale. The proceeds will then be used to purchase the replacement property from the EAT. The EAT will pay off any purchase money loans obtained to purchase the replacement property and, immediately thereafter, convey the replacement property to the client by Special Warranty Deed to complete the exchange.
Section 1031 Construction Exchanges
Many clients desire to complete a 1031 exchange by not only applying a portion of the proceeds from the sale of relinquished property toward the subsequent purchase of a replacement property, but also using the proceeds for construction of certain improvements to that property.
The IRS has strict regulations on a taxpayer’s ability to use exchange proceeds toward construction costs on replacement property. Exchange proceeds may only be used to purchase real estate, not labor and materials. To resolve this dilemma, title to the property must be temporarily vested in the name of an Exchange Accommodation Titleholder (EAT) until construction is complete.
The Construction Exchange Process
To facilitate construction exchanges in which TREXCO is involved, we have formed a separate holding entity, Title Resources, LLC, to act as EAT and hold title pending the completion of construction on the replacement property.
In order to initiate a construction exchange, you must first appoint Title Resources, LLC as Exchange Accommodation Titleholder, and execute several instruments required to document the exchange, including the following:
- Qualified Exchange Accommodation Agreement – This agreement outlines the client’s rights and obligations and the nature of the exchange.
- Assignment of Rights and Notification – Replacement Property – This assigns the purchaser’s interest in the contract to the EAT and entitles the EAT to purchase property and obtain the title pending the completion of improvements.
- Construction Exchange Waiver and Release – This form outlines the time deadlines and client obligations in the construction exchange process.
In the event the property purchase and the construction cost will exceed the balance of the exchange proceeds, the client will need to arrange for financing through a third party lender.