There are many reasons that real estate investors, sellers, and buyers enter a 1031 Exchange. Because the properties exchanged under Section 1031 are subject to substantial tax deferrals, an investor can effectively postpone capital gains and depreciation recapture taxes for years on end.
At NNN Deal Finder, we understand all the nuances and complexities of a 1031 Exchange. With access to a network of reputable triple-net properties, we can help each seller and buyer exchange the property right for their needs.
With these special tax-deferred exchanges, investors can own real estate they might have otherwise never afforded. In doing so, both buyer and seller alike can diversify their holdings while strengthening their equity and passive income investments.
Before entering a 1031 Exchange, all parties involved should be aware of the exact language of the purchase and sale agreement. A 1031 addendum may be vital to ensuring the viability of the tax-deferred exchange.
Role of a 1031 Addendum in a Tax-Deferred Exchange
Although a 1031 addendum is not a prerequisite of the Internal Revenue Code, it is still useful in establishing certain critical aspects of any purchase and sale agreement. Parties to the contract will typically use an addendum to ensure the contract is fully fleshed out and understood.
A 1031 addendum is also a smart way to avoid problems when closing the transaction, such as property disputes, concerns of intent, and confusion over the potential liability of a given party.
Typically, a 1031 Exchange addendum functions to serve two primary goals.
Firstly, it underlines that the seller and/or buyer intends to exchange under Section 1031. This signals that the parties to the contract may not simply be buying or selling outright but are rather ‘swapping.’
Secondly, once it’s established that the real estate contract features a 1031 tax-deferred exchange, a party can use the addendum to inform the other party that the contract will be assigned to a qualified intermediary.
Role of the Qualified Intermediary in a Purchase and Sale Agreement
A sound 1031 tax-deferred exchange usually requires the professional services of a qualified intermediary. This entity, person, or company will help ensure that the transfer of property proceeds is appropriately managed between buyer and seller.
The qualified intermediary enters into a written agreement to facilitate the proper sale of the relinquished property and purchase of a replacement property. Through specific language in the agreement, each party agrees to an assignment of the position of buyer or seller to the qualified intermediary.
Having this intermediary assignment is critical in ensuring the timely closing of a transaction, avoiding certain costs, liabilities, or delays, and streamlining the sale and purchase under IRC Section 1031.
Beyond the assignment of the 1031 Exchange accommodator, the cooperative details of the contract must also be clearly stated.
When adding a 1031 Exchange addendum to the contract, certain language is suggested to articulate how the parties will cooperate throughout the 1031 Exchange transaction. This so-called exchange cooperation clause is an important feature in any 1031 Exchange addendum.
Buyer and Seller Roles in Relinquished Property and Replacement Property
It is important that both the buyer and seller in a 1031 tax-deferred exchange express their agreement as part of the overall real estate contract. With the appropriate language, the 1031 Exchange addendum can assign necessary roles, show intent to cooperate, and facilitate the overall exchange and contract.
The exchange cooperation clause should make all of this explicitly clear.
Express Intent to Undergo a 1031 Exchange
The language relevant to these exchanges is very simple. A portion should state that the buyer is aware of the seller’s intent to use IRC Section 1031 for a tax-deferred transaction. It must also be communicated that the buyer agrees that the seller has assigned the contract.
Put simply, the seller requests buyer’s cooperation throughout the exchange.
Likewise, it must be stated that the seller is aware of the buyer’s intent under IRC Section 1031. Both parties must cooperate. Without cooperation, it may be impossible to ensure the proper transfer of funds or the closing of the transaction.
This is a good way to explicitly state that there is a 1031 addendum to the real estate contract.
Express Immunity from Costs, Liabilities, or Delays
By acknowledging and entering into the 1031 Exchange, the seller agrees to sustain the buyer’s immunity from claims, costs, liabilities, or delays related to the exchange.
Overall, the 1031 addendum is critical in establishing that the real estate contract is not a traditional sale. The assignment of the qualified intermediary should be obvious. The buyer’s and seller’s rights assigned should be obvious.
Through explicit language, the seller, buyer, and any other party reviewing the addendum can clearly understand the 1031 nature of the contract. The assignment of other parties must also be clearly articulated.
If a buyer or seller intends to perform a 1031 Exchange, those intentions must be unequivocal.
Finalizing the 1031 Addendum
If you’re entering a 1031 Exchange for relinquished and replacement real estate, you need a professional to guide you. While a qualified intermediary is useful, an intermediary alone cannot handle many of the complexities and nuances of the real estate contract.
At NNN Deal Finder, we can help you from start to finish, addressing every challenge, expense, question, and concern throughout the process.
With our 1031 Exchange specialists, you can effectively structure the real estate contract perfect for your investment goals. Consult our investment property experts today.