This Tuesday’s Tip covers an essential part of a valid 1031 tax-deferred exchange: the assignment of the sales agreements to the Qualified Intermediary (QI).
When acting as the QI, 1031 CORP. initiates the 1031 exchange by preparing an Exchange Agreement, which outlines the relationship between the Exchanger and the QI. A few of the key ingredients to an Exchange Agreement are highlighted below:
- An assignment of the Exchanger’s rights in the relinquished and replacement properties to the QI for purposes of the 1031 exchange;
- Restrictions on the Exchanger’s ability to access the exchange funds; and
- Requirements of the 45-Day Identification Period and 180-Day Exchange Period.
We are also required to notify the Buyer of the relinquished property and the Seller of the replacement property of the Exchanger’s intent to complete a 1031 exchange. The notification must be made in writing but the Buyer and Seller are not required to sign it. The notification also assures the Buyer of the relinquished property and the Seller of the replacement property that the 1031 exchange will not create additional costs or liability and will not delay closing.
If the rights in the relinquished property have been assigned from the Exchanger to 1031 CORP., it makes sense you would need to also sign the Exchanger’s rights in the Agreements of Sale with the Buyer of the relinquished property and Seller of the replacement property to 1031 CORP.
The assignment and notification can be done in any of the following manners:
- 1031 Exchange Addendum to the Agreement of Sale signed either at the same time as the Agreement of Sale or any time before closing;
- 1031 Exchange Assignment signed at closing; or
- 1031 Exchange Notice and Assignment provided directly to the Buyer of the relinquished property or Seller of the replacement property that does not require a signature.
In order to have funds released from an exchange account for an earnest money deposit on a replacement property, the Agreement of Sale with the Seller must be assigned to 1031 CORP. We simply need a signed copy of the Agreement of Sale, the assignment and written authorization to release the funds from the Exchanger.
Our Exchange Team is always happy to review these documents and procedures with our clients.
