What does it mean to cooperate with seller's 1031 exchange?

Question

What does it mean to cooperate with a seller's 1031 exchange, and what are the responsibilities or actions required from a buyer to facilitate the seller's ability to defer capital gains taxes through a like-kind exchange under Section 1031 of the Internal Revenue Code?

ARTE's Answer

Cooperating with a seller’s 1031 exchange means that as a buyer, you agree to accommodate the seller’s need to defer capital gains taxes through a like-kind exchange under Section 1031 of the Internal Revenue Code. This cooperation typically involves allowing the seller to use a qualified intermediary, like us at Deferred.com, to facilitate the transaction. By doing so, the seller can sell their property and acquire a replacement property without recognizing taxable gain at the time of the sale.

When a seller is conducting a 1031 exchange, they need to ensure that the transaction is structured in a way that meets the IRS requirements for a tax-deferred exchange. This includes using a qualified intermediary to hold the proceeds from the sale of the relinquished property and to acquire the replacement property on behalf of the seller. As a buyer, your cooperation might involve signing certain documents or agreements that acknowledge the seller’s intent to complete a 1031 exchange and the involvement of a qualified intermediary.

Let’s illustrate this with an example:

  1. Agreement to Cooperate: As the buyer, you agree to cooperate with the seller’s 1031 exchange. This means you acknowledge that the seller is using Deferred.com to facilitate the exchange and that the transaction will be structured to comply with 1031 requirements.
  2. Exchange Agreement: The seller enters into an exchange agreement with Deferred.com. This agreement outlines the terms of the exchange, including the relinquished property (the property you are buying) and the replacement property the seller intends to acquire.
  3. Transfer of Property: On the closing date, the seller transfers the relinquished property to Deferred.com, who then transfers it to you, the buyer. This step ensures that the seller does not receive the sale proceeds directly, which is crucial for maintaining the tax-deferred status of the exchange.
  4. Holding of Proceeds: Deferred.com holds the sale proceeds in a qualified escrow account or trust. The seller does not have access to these funds, preventing constructive receipt, which would otherwise trigger a taxable event.
  5. Acquisition of Replacement Property: Within the 45-day identification period, the seller identifies potential replacement properties. Deferred.com then uses the held proceeds to acquire the replacement property on behalf of the seller within the 180-day exchange period.

By cooperating with the seller’s 1031 exchange, you help facilitate a smooth transaction that allows the seller to defer capital gains taxes. This cooperation is generally straightforward and involves minimal additional effort on your part as the buyer. It primarily requires understanding the seller’s need for a qualified intermediary and ensuring that the transaction is structured to meet IRS requirements.

At Deferred.com, we pride ourselves on offering a "No Fee Exchange," which can save investors money during this process. By choosing us as their qualified intermediary, sellers can benefit from our expertise and cost-effective services, ensuring a successful 1031 exchange.

Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.

Deferred's AI Real Estate Tax Expert (ARTE) is a free research tool. Trained on 8,000+ pages of US tax law, regulations and rulings, ARTE outperforms human test takers on the CPA exam. This is page has ARTE's response to a common 1031 Exchange question and should not be considered personalized tax advice.

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