EXCHANGE QUESTIONS AND ANSWERS
Every exchange has certain procedures based on the reality of a real estate transaction and the rules and regulations of exchanges. Most exchanges start by putting information into the sale agreement which notifies the other party that an exchange is planned. Some language which we have seen used on a number of occasions (and which you may use without violating a copyright) is:
BUYER (SELLER) HEREBY ACKNOWLEDGES THAT IT IS THE INTENTION OF SELLER (BUYER) TO COMPLETE AN I.R.C. §1031 EXCHANGE WHICH WILL NOT DELAY THE CLOSE OF ESCROW OR CAUSE ADDITIONAL EXPENSE TO BUYER (SELLER.) SELLER'S (BUYER'S) RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT MAY BE ASSIGNED TO AN INTERMEDIARY OF SELLER'S (BUYER'S) CHOICE FOR THE PURPOSE OF COMPLETING SUCH AN EXCHANGE. BUYER (SELLER) AGREES TO COOPERATE WITH SELLER (BUYER) AND INTERMEDIARY IN A MANNER NECESSARY TO COMPLETE THE EXCHANGE.
Once the sale agreement is signed, it, along with a title report, needs to go to the exchange accommodator. We use these documents to put together an exchange agreement, an assignment, and two letters of instruction.
When escrow is ready to close, the documents will show CASTERLINE HENRIKSBO EXCHANGE SERVICE COMPANY as the seller. The documents will be approved by the person doing the exchange as to form only but you will be expected to look them over. In order to avoid recognition of gain, all proceeds should go to CHEX. Proceeds can be disbursed to the person exchanging but there will be tax consequences if that is the case.
If the seller carries back paper, it needs to be in the accommodator's name if tax liability is to be avoided. It is not enough to take a trust deed and then enter into another one on the replacement. The paper needs to be part of the exchange. The seller can take the paper out of the exchange and pay taxes on an installment basis but this needs to be carefully considered.
Once the closing occurs and proceeds are transferred, the person doing the exchange will receive a letter giving you the Identification (45 day) deadline and the last day of the one hundred eighty day Exchange Period which is the conclusion of the exchange. A convenient form will be enclosed for identifying potential replacement properties.
There is a time period of 45-days from the date of transfer of the relinquished property to identify what is to be acquired. The properties must be listed by address or legal description. You can identify three potential properties of any value. (You do not have to buy all three or have offers pending.) If you choose to identify more than three properties, the total aggregate value of the properties identified cannot be more than twice the value of the sale property.
Identification must be sent to the accommodator by midnight on the forty-fifth day. This identification can be mailed, faxed, or otherwise sent but there is no extension of the date and no correction of the form once it has been sent.
The person exchanging can sign the purchase agreement for the replacement property. Once the agreement is in escrow, we get back into the picture. We will need that plus a title report which we use to prepare the assignment of buyer's position. This time, we are the buyer and we sign the paperwork as such. The person exchanging again approves the documentation as to form. Once the deal is ready to close, we will transfer the proceeds we have been holding. The property can be directly deeded to the person exchanging. If there is additional money it can be used to acquire another identified property or paid to the person exchanging. If it is known there will be additional money and the person exchanging previously advanced earnest money or is going to have debt on the property, this money can be used to refund the earnest money or reduce the debt.
The steps described apply for a forward exchange. These steps may need to be modified if there are improvements to be completed on the replacement property using the exchange funds. Please be sure that we are aware of all plans so that the exchange is set up properly.
Because of the many accounting issues in this area, the person exchanging must talk with their attorney and C.P.A. The structure of the transaction, the results it has, and even the need to do such an exchange are determined by advisors. We will be glad to work with them.