Recommended Real Estate Contract Language for 1031 Exchanges

Performing a 1031 tax-deferred exchange these days is a lot simpler than it used to be.  Still, there are important things that you should know as real estate agents to make sure that you provide the highest level of service to your 1031 client.  One of the most common, and perhaps most significant, questions that is often asked is, “What language do I need to include in the purchase and sale agreement?”  
 
There are two main things that you should always check for in the purchase and sale agreement to protect your client in a 1031 exchange.  First, make sure that the purchase and sale agreements on both the relinquished and replacement properties are assignable, so that a qualified intermediary may “step into the shoes” of your client to successfully perform the exchange.  Second, include language in the purchase and sale agreements or addendums that establishes your client’s intent to perform a 1031 tax-deferred exchange.

There is no specific language that is required, but here are a couple of examples of what many investors use:

Sale of Relinquished Property

Buyer is aware that Seller intends to perform a 1031 tax-deferred exchange pursuant to Section 1031 of the Internal Revenue Code.  Buyer accordingly agrees to an assignment of the rights under this contract by the Seller to First American Exchange Company, a Qualified Intermediary.  Buyer agrees to cooperate in such exchange at no cost or liability to Buyer.  

Purchase of Replacement Property

Seller is aware that Buyer intends to perform a 1031 Tax Deferred Exchange pursuant to Section 1031 of the Internal Revenue Code.  Seller accordingly agrees to an assignment of the rights under this contract by the Buyer to First American Exchange Company, a Qualified Intermediary.   Seller agrees to cooperate in such exchange at no cost or liability to Seller.

Similar language will also appear in the exchange instructions that your client will sign to further establish your client’s intent to perform the exchange.  First American Exchange will coordinate with your closing agent and prepare and provide escrow with four documents that are required to create the exchange:

1. Exchange Instructions;
2. Exchange Agreement;
3. Assignment of the Purchase Contract (signed by your client) and
4. Notice of Assignment (signed by both the Buyer and the Seller).

Completing a 1031 exchange requires the appropriate documentation; at First American Exchange we help you and your client with that process for a successful exchange.