Contract language is an extremely important part of any 1031 Exchange. To perform an exchange, intent must be established in the contract itself. This intent is crucial for qualification for the exchange for the IRS. The intent or motive behind the sale and purchase of property is what differentiates a 1031 Exchange from any other real estate transaction.
By adding this specific verbiage into both your purchase and sale contracts, you will establish the intent and motive to sell your investment property and purchase a new one to be used for investment purposes. Not only does this language establish your intent, but it allows companies like Exchange Resources to be assigned to the sale and purchase contracts.
What Does this Language Look Like?
We recommend adding these statements directly to your sale and purchase contracts. This will establish the investor’s intent to perform a tax deferred exchange and release the other parties from costs or liabilities as a result of the exchange.
Sale of Relinquished Property
“Buyer hereby acknowledges that it is the intent of the seller to affect a 1031 exchange. The seller’s rights and obligations under this agreement will be assigned to Exchange Resources, Inc. for the purpose of completing an exchange. Buyer agrees to cooperate at no additional cost or liability with seller and Exchange Resources, Inc. in a manner necessary to complete the exchange.”
Purchase of Replacement Property
“Seller hereby acknowledges that it is the intent of buyer to affect a 1031 Exchange. The buyer’s rights and obligations under this agreement will be assigned to Exchange Resources, Inc. for the purpose of completing an exchange. Seller agrees to cooperate at no additional cost or liability with buyer and Exchange Resources, Inc. in a manner necessary to complete exchange.”
Why Do I Need to Add This Language to My Contracts?
Once a company like Exchange Resources has been assigned into the transaction, they become the seller or the buyer depending on the stage you are in during your 1031 Exchange. The language added to the contract creates a door for the company to perform all tasks needed to complete the exchange.
The Internal Revenue Code requires that there is language in both the sale and purchase contracts establishing the investor’s (ERI) intent to perform an exchange. It is important that both contracts are assignable. In order to structure a typical exchange transaction, ERI must be assigned in as the seller of the relinquished property and also as the buyer of the replacement property.
If you are ever audited, adding this language into your contracts will establish a motive for the sale and purchase of property. It is added in to protect all parties involved in both the sale and the purchase. This language shows that there is not a problem for either side of the purchase or sale.
Who is Responsible for Adding the Language to My Contract?
The real estate agents who are involved in both the sale and the purchase are responsible for adding this language into your contracts. It must be added in on both the buyer and the seller’s sides to ensure the contracts are assignable to a company like ERI.
If the language is not added into the original contracts, ERI would ask the agents to add the language once they are involved in escrow. A company like ERI would not be able to fully perform the elements of their job until this language is added into the contract.
As a second option, you may also use an IRS form that all parties involved sign in lieu of adding the language directly to the contracts.
The language in the contract is crucial to performing a 1031 Exchange. If you do not use the correct language when participating in the sale, you run the risk of not establishing the proper intent and motive for your exchange. You also cannot assign companies like ERI to your contacts to help you complete your exchange. By adding the correct language during escrow, you avoid these issues and can have a smooth exchange.