Direct Deeding

The regulation counts an assignment as an acquisition and transfer.

A qualified intermediary must acquire the relinquished property from you, transfer it, acquire the replacement and transfer it to you. Paragraph (g)(4)(iv)(B) and (C) of Reg. section 1.1031(k)-1 treat the intermediary as doing so if it enters into the sale and purchase agreements and the properties are transferred under them.

Paragraph (g)(4)(v) treats the intermediary as entering into an agreement when your rights in it are assigned to the intermediary and all parties are notified in writing of the assignment on or before the date of the relevant transfer. That is why an exchange cooperation clause and an assignment form are standard closing documents.

The same rule works on the purchase side. You sign a contract to buy the replacement, assign it to the intermediary, and notify the seller in writing before closing; the seller then deeds to you while the intermediary pays the price from exchange funds, as in Example 4.

Examples 4 and 5 of the regulation show the right and wrong way to do it.

Example 4: B agrees to sell property X to D for $100,000, assigns the contract to intermediary C, and notifies D in writing on closing day. B deeds X directly to D, who pays $10,000 to B and $90,000 to C. B later assigns a $90,000 purchase contract for property L to C with written notice, and the seller deeds L directly to B. C is a qualified intermediary, and the exchange qualifies; the $10,000 is boot.

Example 5: B deeds X to D under B's own contract and tells D to send the money to C, but the contract was never assigned and C never contracted with D. C is not treated as acquiring X, so it is not a qualified intermediary, and B has sold X and bought replacement property in a separate purchase. The difference is a one-page assignment and a written notice.

Apply this to your own closing with your attorney and intermediary, and see what an intermediary needs to open an exchange.

Direct deeding bites at the closing table, and it also limits how many deeds are recorded.

The written notice must reach every party to the agreement on or before the transfer, so a notice sent after recording is too late. When your contract is signed before you hire an intermediary, the assignment can still be made, as in Example 4, if notice goes out before closing.

Because only one deed is recorded for each property, no deed runs to or from the intermediary. Whether that matters for transfer or recording tax depends on your state; see the settlement statement for a 1031 exchange. Funds protection is separate: see qualified escrow account.