1031 Tax Exchanges
An exchange is rarely a 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 investor's old (relinquished) property, and the seller
who is selling the investor a new (replacement) property. To obtain the
benefit of the "Safe Harbor" protections of the tax code to
prevent actual or constructive receipt of the exchange proceeds, which
would disqualify the exchange treatment, prudent investors use the
services of a Qualified Intermediary. The Qualified Intermediary becomes a
fourth party principal in both simultaneous and delayed exchanges. As
illustrated in the above diagram, the steps for executing an exchange are
- The exchanger signs a contract to sell a relinquished property to
- An entity is retained to be the Qualified Intermediary and they
assign into the exchanger's rights in the sale contract.
- At the closing of the relinquished property the exchange funds are
wired and instruct the settlement officer to transfer the deed
directly from the exchanger to the buyer.
- The exchanger has a maximum of 180 days in the exchange period (or
until the tax filing deadline, including extensions, for the year of
the sale of the relinquished property) to acquire all replacement
- Unless the exchanger can acquire all replacement property within
the first 45 days from the close of the relinquished property, the
exchange must identify possible replacement properties in writing
within the 45-day identification period.
- The exchanger signs a contract to purchase the replacement
property with the seller and assigns into the exchanger's rights in
the purchase contract.
- At the closing of the replacement property, the intermediary wires
the exchange funds to complete the exchange and instructs the
settlement officer to transfer the deed directly from the seller to
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 seller's
rights under this agreement may be assigned to a qualified intermediary,
for the purpose of completing such an exchange. Buyer agrees to cooperate
with the seller and intermediary to complete the exchange. (Switch buyer
and seller for the cooperation clause for the purchase contract.
Excerpted from our exchange Intermediary -
Fidelity National 1031 Exchange Services, Inc.
This information is believed to be accurate but is not warranted nor is it
rendering any sort of tax or legal advice by any means.