You are in the ideal position to recommend an exchange when appropriate. Oftentimes the Seller is unaware of 1031 exchanges and misses the opportunity. Suggest a 1031 exchange any time the Seller does not live in the property and you may be able to help the Seller defer significant gains while earning a great referral source.  Request a co-branded “Hold on to Your Money” or “1031 Exchanges Made Easy” flier from 1031 CORP. to give to the Seller.

You will be asked to make minor changes to the closing statement to reflect the exchange. Most other aspects of the transaction are handled as normal. The QI will forward detailed instructions prior to closing. The QI will sign the Settlement Statement after it is approved by the Exchanger and you will be asked to wire the net proceeds to the QI. On the purchase side, the QI will transfer the exchange funds to you for the acquisition of the replacement property.

While the 1031 regulations do not specifically require the changes to the closing statement, the changes do go a long way to properly document the exchange transaction in the unlikely event of an audit. Some of the changes a QI will ask the closing officer to make include:

• List 1031 CORP. as Qualified Intermediary for the Exchanger
• Provide a signature line for the QI and a "Read and Approved" line for the Exchanger
• Any excess funds are usually returned to the QI and held until the end of the 180-Day Exchange Period

Unfortunately no lender fees (application fees, points, etc.) can be paid from the exchange funds when purchasing the replacement property. These fees are classified as loan acquisition fees and not routine property closing costs. The Exchanger must pay these fees out-of-pocket.

In a typical exchange, title insurance is handled as normal.

When the Exchanger sells the relinquished property, the 1099-S should include the Exchanger’s name and address. In a typical exchange, the QI should not be listed on the 1099-S. The full consideration should be shown and when applicable, check the box indicating that additional property or services will be received as consideration.

There are two general purposes of this clause. (1) Provide the required notification to the other party of the transaction of the Exchanger’s intent to complete a 1031 exchange; and (2) assign Exchanger’s rights (but not obligations) in the Agreement of Sale to the QI. 

In a typical exchange, the deed is prepared as normal with the Seller conveying title directly to the Buyer.

As the Exchanger cannot have actual or constructive rights to the exchange proceeds, paying any funds to the Exchanger can create a taxable event. Whenever there are excess funds for the purchase of replacement property, contact the QI for instructions immediately. When in doubt, always forward excess funds to the QI.

There is a requirement that title to both the relinquished and replacement properties be vested in the same owner. If the Exchanger asks you to vest title in a manner inconsistent with the QI’s instructions, contact the QI immediately.

There is a requirement that the replacement property be of equal or greater value than the relinquished property. If adding a spouse to the deed, the value of the Exchanger’s percentage of ownership must be equal or greater than the net selling price of the relinquished property.  Generally to make it feasible to add a spouse without creating a taxable event, the Exchanger’s replacement property must be at least twice as valuable as the relinquished property. Be sure to let the QI know immediately if you are asked to add another party to the deed.

An exception to the same taxpayer requirement is a disregarded entity in which the underlying owner/sole member is the same one that sold the relinquished property.