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 relatively simple.

The exchanger signs a contract to sell a relinquished property to the buyer. 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 our Attorney, John Ruffulo, can act as our intermediary with his 1031 corporation as does Fidelity’s IPX Exchange Services.

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 properties.

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 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 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.