Once you know a few basic rules of 1031 exchanges, you have the power to help your clients navigate the process easily.
While we appreciate all the advance notice possible, an exchange can typically be accomplished right up until closing. However, once the property has been closed on, a 1031 Exchange is not possible.
The IRS rules specify that an exchange must be handled by a Qualified Intermediary (QI). Midland 1031 fulfills this role and takes it a step further with Certified Exchange Specialists (CES) on our team.
When one of your clients saves capital gains taxes because you connected them with the services of Midland 1031 for a 1031 Exchange, you'll likely have a friend for life.
What language needs to be included in the contract?
LANGUAGE FOR SALE OF RELINQUISHED PROPERTY:
“Buyer is aware that Seller has the option to qualify this transaction as an Internal Revenue Code Section 1031 tax-deferred exchange. Seller requests Buyer’s cooperation in the event of an exchange and agrees to the assignment of this contract to Midland 1031, LLC by the Seller. Seller agrees to hold the Buyer harmless from any and all claims, liabilities, and costs of such an exchange.”
LANGUAGE FOR PURCHASE OF REPLACEMENT PROPERTY:
“Seller acknowledges and agrees that the Buyer may engage in a deferred or reverse exchange of like-kind property utilizing a qualified intermediary (QI) or an exchange accommodator titleholder (EAT) pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations, revenue procedures and other guidance promulgated thereunder. Notwithstanding any provision herein to the contrary, in the event the Buyer elects to engage in a deferred or reverse like-kind exchange, the Seller agrees to consent to the assignment of Buyer’s rights under this Agreement to a QI or EAT to facilitate such deferred or reverse like-kind exchange.
Seller further agrees to execute any and all documents reasonably necessary to consummate the purposes of this section. In the event Buyer engages an EAT for its exchange, Seller agrees to transfer legal title to the property to such EAT pursuant to instruments of transfer otherwise complying with the terms of this agreement. Any assignment by the Buyer in conformance with this section shall be at the cost of the Buyer. Such assignment shall not relieve Buyer of any of its obligations (including any post-closing obligations) or liabilities under this Agreement or delay the closing hereunder."
If I think my client may benefit from a 1031 exchange, what's the best course of action?
We can understand why you would be hesitant to bring it up. Your clients will inevitably have questions! We suggest giving us a call to discuss the preliminary details before you bring it up to your client. That way, we can assess the situation and see if your client meets the exchange's initial criteria. Other real estate agents tell their clients the importance of reaching out to a QI individually. Clients can directly discuss their scenario with the QI to see if they meet the requirements and have their questions addressed. You may call with the client on the line if you or your client want you to be a part of the discussion. Better yet, click here to set up a video conference with us.
My client is selling a duplex and wants to acquire a single-family residence as their replacement property. Are they allowed to do that?
Absolutely. All real estate qualifies as long as it is held for investment or business use. As long as your client is selling investment property to purchasing investment property, there is no issue.
How long does it take to get the exchange set up?
Sometimes we don’t even know that the client wants to do an exchange until they are near or at closing.
For standard exchanges, exchange documentation and closing instructions are typically sent out within 24 hours after receiving all necessary information and contracts. If your client is at closing and realizes that they need to set up an exchange, contact Midland 1031 immediately. Once your client leaves the closing, the opportunity to set up the exchange is lost. For Reverse and Improvement Exchanges, we request at least two to three weeks advance due to the complexity of these types of exchanges.
I don’t want to risk having this deal fall-through. How complicated is the exchange?
Most exchanges can be seamless. A 1031 exchange is especially smooth if it is set up in advance of closing on the sale. As the Realtor®, you have no additional obligation other than cooperating with the exchange. Even with more complex transactions, the exchange component can still be seamless, especially with advanced planning.