Assignment of Contract to the Qualified Intermediary (QI)

The assignment is how the regulations let the QI step into a contract you already signed.

A qualified intermediary under Reg. section 1.1031(k)-1(g)(4)(iii) must, as required by the exchange agreement, acquire the relinquished property from you, transfer it, acquire the replacement property and transfer it to you. Paragraph (g)(4)(iv) says the QI meets that test if it enters into the agreement with the buyer or seller and the property moves under that agreement.

Paragraph (g)(4)(v) then supplies the bridge: an intermediary is treated as entering into an agreement if the rights of a party to it are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer. Publication 544 restates the same rule.

The regulation speaks of assigning rights. Your obligations to the buyer or seller are not shifted by this provision, which is why the counterparty usually needs only notice, not consent, under the tax rule; what the contract itself requires is a matter of its own terms and state law.

The regulation's own example runs the assignment on both legs.

In Example 4 of Reg. section 1.1031(k)-1(g)(8), B signs a contract on 1 May to sell property X to D for $100,000, assigns its rights in that contract to the intermediary C, and notifies D in writing on 17 May, the day B deeds X directly to D. B later signs a contract with E to buy property L for $90,000, assigns that contract to C and notifies E in writing before E deeds L directly to B.

Because both contracts were assigned and both counterparties were notified on or before each transfer, C is treated as acquiring and transferring both properties and is a qualified intermediary. The $10,000 D paid to B directly is boot, but the exchange stands.

It bites when the second leg is forgotten or the notice arrives after the deed.

Example 5 in the same paragraph is the warning. The taxpayer signed an exchange agreement with C but never assigned the sale contract to C, and C never contracted with the buyer. B deeded the property to the buyer and had the money sent to C. The regulation holds that C was not a qualified intermediary and that B sold X and bought replacement property, so there was no exchange.

Late paperwork is the common failure, because the notice must exist on or before the transfer date. A cooperation clause in the contract is not the assignment; it only obliges the other side to accept one. Ask your intermediary what it needs before each closing; see what a QI needs to open an exchange and how the same paperwork works in a same-day simultaneous exchange.