Cooperation Clause for 1031 Exchange

To create a valid 1031 exchange, the taxpayer must assign his rights under the purchase and sale agreement to First American Exchange. In addition, the taxpayer must provide written notice of that assignment to all parties to the contract, and it is usually advisable to get the other parties to acknowledge they have received the notice. The assignment and notice are required in connection with both the sale of the relinquished property and the purchase of the replacement property. 

In order to facilitate the assignment and notice, most tax advisors recommend adding language to the purchase and sale agreement that the taxpayer’s rights are assignable to First American Exchange and that the other parties to the contract will cooperate in the exchange. 

First American Exchange does not require that you use any specific language in your contracts, but this article includes some sample language that is often used. This language may not be appropriate for your particular situation, so you should have your advisors review and revise it as necessary. 

Sale of Relinquished Property

Buyer acknowledges that Seller intends to perform a 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 as long as it does not delay the closing or cause additional expense to Buyer.

Purchase of Replacement Property

Seller acknowledges that Buyer intends to perform a 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 as long as it does not delay the closing or cause additional expense to Seller.

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