"1031 Cooperation clause": Should I include it in my sale contrac

New Hyde Park, NY · Member since 2018 · 18 posts · 5 votes

I am close to going into contract for the sale of my property. Is it required or desirable to include a 1031 cooperation clause or any other language regarding my intent to sell this property as part of a 1031 exchange?

(The closing will be scheduled several months from contract signing, at which time I will probably already know the property I will purchase. If not then I will know well within the 45 day period.)

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8y
Yes, most standard contracts include language to that effect.
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Jacqueline Gardiner
Engineer · Genoa, NV · Member since 2016 · 87 posts · 59 votes
8y
I know that my contract included that when I sold. There were no issues that ever came up, but there’s no downside to including it.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Jeff Klein, There is no requirement for 1031 language to be in the contract. There is a requirement that all parties to the 1031 (both sides of the table) have to be notified to the 1031. We always have a notice of assignment as part of the closing package that satisfies the regs whether or not there has been an addendum in the contract.
It's becoming less and less of an issue but there are folks who like to keep their business private when selling a property thinking it may give the other side a competitive advantage. Buyers who don't understand 1031 exchanges can still raise red flags. These are reasons why some clients don't want to have to reveal their 1031. It's more of an issue on the buy side because the seller then knows that the buyer is under a time gun.
If you want to notify in your contract with some language that's fine. Many individual MLS contracts now have regular addendum language in a check the box format. Or you can put your own in as well (if you want pm me and I'll give you a sample our clients sometimes use).
If you don't want to that's fine as well. Make sure your QI will have a notice for all (in addition to the regular closing documents) at the closing of the property. And I'd also recommend that at the least you make your contract assignable. Assignability can have the same perceptual issues as a 1031 notice given the wholesaler infestation right now. But a successful 1031 exchange depends on a technical assignment of your rights to sell the property. The QI normally is listed in the seller box of the settlement statement "XXX as QI for John Doe". So there is a technical assignment of contract rights. Making the contract assignable puts a stop to any issues with that.
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Jeff Klein
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New Hyde Park, NY · Member since 2018 · 18 posts · 5 votes
8y
Dave,
Thanks for the response. Could you please dumb down that last paragraph?
I'm referring to "But a successful 1031 exchange depends on a technical assignment of your rights to sell the property. The QI normally is listed in the seller box of the settlement statement "XXX as QI for John Doe". So there is a technical assignment of contract rights. Making the contract assignable puts a stop to any issues with that."
To make the 1031 exchange successful, you're saying that I have to assign my rights to sell the property? My lawyer is an experienced RE attorney but he has not mentioned this. I would really appreciate it if you can help me understand this.
Also, I was not aware that I need a QI involved in the contract of sale. But you may not be saying that. I haven't even contacted a QI yet.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Jeff Klein, The technical convention for the 1031 is that you assign your rights to sell (and later to buy) your relinquished property to the QI. Title should always be directly deeded from you to the buyer and from the seller to you. But the QI is on the settlement statement as a signator as the seller and buyer. This is why the seller block would say something like Seller: Exchange Resource Group as QI for Jeff Klein.
For every exchange there needs to be executed at closing
1. The exchange agreement which outlines the functions of the QI for you and your relationship with them.
2. The assignment of your rights to sell or to buy
3. A notice of the assignment of rights (this is the 1031 notification to all parties)
4. The Qualified Exchange account set up - between you and the bank and QI.
When the mechanism is applied this way you neither sell or buy property officially - you "exchange" with your QI. And somewhere way back there's an appellate ruling where the judge specifically called this - "The legal fiction of the 1031 exchange".
This is the only reason why having a contract assignable might be a good idea. If you had a really crotchety seller or buyer they could conceivably balk at the 1031 because of the assignment. However in 18 years of doing this I've only had it questioned a couple of times. And I've never had a 1031 go bad because of it.
You're right - you do not need to have a QI in place to go into contract. Many of our clients anticipating a contract will ask us for contract language and we're happy to provide. But your QI technically only needs to be in place prior to the closing.
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Jeff Klein
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New Hyde Park, NY · Member since 2018 · 18 posts · 5 votes
8y
Dave,
The contract already has this paragraph:
"if Seller or Purchaser is or may in the future be under contract with a qualified intermediary for the purpose of effecting a tax-deferred exchange in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, each party consents to the assignment of this contract to such intermediary. Each party shall cooperate with the other and with the qualified intermediary to accomplish such exchange and shall perform any acts and execute any and all documents reasonably necessary to assist in such exchange, provided that neither party shall be required to accept title to any property other than the Premises, expend any additional amounts of money above those amounts for which it is obligated under this contact or extend the Closing Date, and Seller’s time to close under this contract shall not be reduced."
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Jeff Klein, Looks good to me!! Any QI should have no problem here. I know it would be fine for us. I don't think you need to add anything to that. And it speaks of "if" so it's not an "in your face" provision. Your attorney does good work!!
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Siouxzie Hanes
Real Estate Agent · Los Angeles, CA · Member since 2016 · 54 posts · 9 votes
8y
Originally posted by @Jeff Klein:

I am close to going into contract for the sale of my property. Is it required or desirable to include a 1031 cooperation clause or any other language regarding my intent to sell this property as part of a 1031 exchange?
(The closing will be scheduled several months from contract signing, at which time I will probably already know the property I will purchase. If not then I will know well within the 45 day period.)
yes.
this is what we use.
"Both Buyer and Seller to cooperate with each other's 1031 exchange, if applicable, at no cost or delay to either party".
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