1031 Exchange Guide for Real Estate Agents: Protecting the Deal and Your Client

The exchange is won or lost before the closing date: engage the intermediary and assign the contract first

A deferred exchange works only if your client never has the sale money in hand. Reg. section 1.1031(k)-1(f)(2) treats a seller as in constructive receipt once funds are 'credited to the taxpayer's account, set apart' or otherwise made available, and the regulation's own example says the result does not change even if the seller chooses not to touch the money. A check made out to your client at closing cannot be fixed later by handing it to an intermediary.

The safe harbor in paragraph (g)(4) lets the intermediary step into a contract your client already signed, provided the rights are assigned to it and 'all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer.' In practice that means the intermediary's assignment and notice documents are signed before the deed is delivered, and the closing instructions send the net proceeds to the intermediary.

Ask about an exchange at the listing appointment, not at the closing table. If your client has not chosen an intermediary, how to choose a qualified intermediary lists the questions to ask.

Write the exchange into both contracts: a cooperation clause, assignability and a closing date inside 180 days

No statute requires an exchange cooperation clause, but it gets the buyer's consent to the assignment and to signing the notice before anyone is under pressure. A typical clause discloses the exchange, permits assignment to an intermediary, and promises the other side no added cost, liability or delay. Do I need an exchange cooperation clause has the elements.

On the purchase side the clause matters more. The replacement contract must be assignable to the intermediary, its closing date must fall inside your client's exchange period, and contingencies should not run past it. Section 1031(a)(3) ends that period 180 days after the sale or at the due date, with extensions, of the client's return for the year of the sale, whichever is earlier.

Hypothetical: a client closes the sale of a rental on March 2. Day 45 ends at midnight on April 16 and day 180 on August 29. A sale that closes in late October runs into the following April's return due date unless the client files an extension; 1031 deadlines in the fourth quarter explains the trap.

You can help with identification, but the written list must go to the intermediary or the seller, never to you

Reg. section 1.1031(k)-1(c) requires replacement property to be designated in a writing signed by the client and sent before day 45 ends, either to the person obligated to transfer the replacement property or to another person involved in the exchange who is not the taxpayer or a disqualified person. Paragraph (k)(2) makes anyone who acted as the client's 'real estate agent or broker within the 2-year period' a disqualified person. A list emailed only to you does not count.

The property must be 'unambiguously described,' which for real estate generally means a legal description, street address or distinguishable name. The client may list three properties of any value, any number whose combined value does not exceed 200% of what was sold, or more than that if 95% of the listed value is actually acquired. How many properties can I identify works through each rule.

Your value here is supply. Showing properties before the sale closes, getting seller counteroffers in writing, and confirming that the client's lender will finance each candidate keeps the day-45 list from being a guess.

A DST is the usual backup when the target property falls through, and it belongs on the list from the start

Under Rev. Rul. 2004-86 an interest in a properly structured Delaware statutory trust is treated as an undivided fractional interest in the trust's real estate, so it is like-kind replacement property. DST offerings are already financed and under management, which is why they can close inside the time left when an inspection or appraisal kills the property your client wanted.

Under the three-property rule a client can list the property you are negotiating plus one or two DST offerings as alternates, and buy only what is needed. If the client identifies nothing that can close, what happens when an identified property falls through after day 45 is usually a taxable result. The DST backup strategy shows how to size the alternate.

Refer the securities part of the exchange and keep the real estate part: compensation follows registration

A DST interest is a security, usually sold in a private placement under Rule 506 of Regulation D. Recommending and selling it is broker-dealer activity under section 15(a) of the Securities Exchange Act, and FINRA Rule 2040 bars member firms from paying commissions or other transaction-based compensation to anyone who would have to register to receive them and is not registered. Do not expect a share of a DST commission unless you hold the licenses and an affiliation.

What you can do is introduce the client, keep representing them on any direct property purchase, and stay in the loop on timing. In our process the client talks with sponsors directly, we reserve equity in one or more offerings, and we coordinate the identification with the client's qualified intermediary; reservations can be released if the sale falls through.