What Is a 1031 Exchange Cooperation Clause?

If you’re planning a 1031 exchange to sell and replace investment or business property, there is one often overlooked yet important concept you should understand. It is how and when to include an Exchange Cooperation Clause in your contracts for sale.

Why is this clause important? An Exchange Cooperation Clause alerts the other party (and any interested third parties) to the fact that your transaction is part of a 1031 exchange. More importantly, the clause requires the other side to cooperate in the exchange.

In most circumstances, this is not a controversial clause to include. In fact, the entire exchange is usually transparent to the involved parties and incurs no costs or delays to them. Most buyers or sellers on the other side of your transactions don’t ever raise an issue with inclusion.

However, if lenders are involved, it is very important to include the clause so that they are aware of the exchange ahead of time. In some cases, lenders are reluctant (especially post-recession) to finance a property purchased with 1031 exchange proceeds. While those situations are becoming more and more infrequent, it is always wise to speak to involved lenders ahead of time to avoid future problems.

While every state has recommendations for such provisions (and they may already exist in your realtor’s standard forms), here is some sample language for reference:

“Buyer hereby acknowledges that it is the intent of the Seller to affect a Section 1031 tax deferred exchange, which will not delay the closing or cause any additional expense to the Buyer. The Seller’s rights under this agreement may be assigned to ____________________ a Qualified Intermediary, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller and ______________________ to complete the exchange.”

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.