Title & Escrow Officers

Benefits of 1031 Exchanges for Title & Escrow Officers

Increase your title orders

  • Educating your existing clients on 1031 exchanges and their many benefits may motivate them to sell property that is no longer fitting their needs and acquire desirable replacement property. 
  • To complete the exchange process, a replacement property must be acquired almost always requiring title insurance.
  • All equity from the sale of the relinquished property must be reinvested but nothing precludes the Exchanger from refinancing the replacement property at a later time. This results in the need to purchase title insurance a second time.

Build customer loyalty

  • Knowing a client’s short and long-term objectives and helping him/her accomplish them establishes you as a trusted advisor. A 1031 exchange is often an excellent vehicle to accomplish these goals and your knowledge of 1031 will be invaluable.
  • Suggesting 1031 exchanges when appropriate can help develop a life-time relationship with a valued client.
  • A client that defers a tax bill today is always thrilled to share his/her success story with others. When asked how he/she learned about 1031 exchanges, your client is always more than happy to pass on your name and contact information. These word-of-mouth referrals are priceless.

How  Title & Escrow Officers Can Use 1031 Exchanges as a Sales & Marketing Tool 

  • Incorporate the suggestion of 1031 exchanges into your daily work habits
    • If the seller does not live in the property, consider suggesting they look into a 1031 exchange.   
  • Include “Knowledgeable in tax-deferral strategies” in your bio and on social networking bios
  • Educate your clients on 1031 exchanges
    • In your electronic and print newsletters
    • On your website
    • By hosting seminars for your real estate and attorney customers and/or investors
    • In your Blog entries
    • In your social networking entries
  • Stay educated on the basics and new developments with 1031 exchanges
  • Bookmark this page and check back for updates
  • Sign up for Exchanging Times® monthly newsletter
  • Attend 1031 seminars and webinars
  • Keep info handy for your customers

FAQs for Title & Escrow Officers

Why should I recommend a 1031 exchange?

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 to give to the Seller.

Is there additional work for the closing agent when a 1031 is involved?

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 their client 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.

Why is it important to make changes to the Settlement Statement?

While the 1031 regulations do not specifically require the changes to the Settlement 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 agent to make include:

  • List the QI as well as the Exchanger
  • Change the word(s) Buyer/Borrower to Exchanger
  • List “1031 Exchange – Replacement Property” at the top of the settlement statement
  • Provide a signature line for the QI
  • Include a line item to show the 1031 exchange funds held on deposit by the QI
  • Any excess funds are usually returned to the QI and held until the end of the 180-Day Exchange Period
Can lender fees be paid from the 1031 exchange funds?

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.

How is title insurance handled when there is a 1031 exchange?

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

How is the Form 1099-S handled when the relinquished property is sold?

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.

What is the purpose of the 1031 exchange assignment agreement? 

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. 

How are the deeds handled in a 1031 exchange?

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

How are excess funds during Exchanger’s acquisition of replacement property handled?

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.

Are there any vesting requirements in a 1031 exchange?

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

Can the Exchanger add a spouse to the deed of the replacement property?

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.

Can the Exchanger acquire the replacement property in the name of an LLC?

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

 

"We used 1031 CORP. three times in the past year. Each transaction went smoothly. Thank you so much for the great service."

-- S. G., Yakima, WA

Need help? Contact our team to ask questions and find out how to get started.

Talk to an Exchange Team Member