In the summer of 2008, I was honored to be asked to author an article for The Auctioneer, the official publication of the National Auctioneers Association, on the subject of Section 1031 exchanges and their application within the auction industry. The article was published in the September 2008 issue. If you would like to access the article online, it can be found on pages 62-64 of this link: The Auctioneer. The article is reprinted in three blog entries; this is the second of the three. (Part 1 can be found here.)
Specific questions about exchanges and auctions:
When should I get in touch with a QI? The important thing to remember is that exchange documents must be 
signed and in place before closing and transfer of title occurs. Many QIs can do the paperwork for an exchange in a matter of twenty-four hours or less, but most prefer to be involved earlier in the process. Bringing the QI in early enables him to gain a thorough understanding of the circumstances, and allows plenty of time for review of all documents and the answering of any questions.
Does a 1031 exchange become a contingency in the contract? How does an exchange affect my “as-is, where-is” sale? If you affiliate yourself with a knowledgeable QI, he will thoroughly explain to your client the various rules and regulations that must be adhered to in order to achieve a successful exchange. With a clear understanding of the requirements of Section 1031, the client can decide whether to proceed with or without an exchange. Whether or not the client enters into an exchange agreement with the QI, the sale can take place without contingencies as to the exchange. In essence, the exchange is external to the auction.
Do I need to put “cooperation language” in the contract? Is there any harm in putting that language in the contract? “Cooperation language” refers to disclosing to the other party that one is involved in an exchange. There is no specific requirement to disclose in the contract that an exchange is in process. On the other hand, in an auction setting it does no harm in disclosing the existence of an exchange. Many commercial real estate companies have incorporated cooperation language into their standard purchase contracts today. If cooperation language is not included in the purchase contract, it is important that there be no prohibitions to assigning the purchase contract, because it must be assigned to the Qualified Intermediary for the exchange to proceed. If present, prohibition language in the contract can be overridden by the parties by using an addendum.
We provide the following language to our clients for their purchase agreements: “It is the intention of Seller to transfer the above-listed property pursuant to Internal Revenue Code Section 1031, which sets forth the requirements for tax-deferred real estate exchanges. Seller’s rights and obligations under this and future agreements will be assigned to Iowa Equity Exchange, qualified intermediary, for the purpose of completing an exchange. Buyer of the above-listed property agrees to cooperate with Seller and Iowa Equity Exchange in a manner necessary to enable Seller to complete said exchange. Such cooperation shall be at no additional cost or liability to Buyer.”
Should I add “1031 Exchanges Welcome” to my advertisements, or something similar? It certainly cannot hurt anything, and it demonstrates your awareness of the process.
As an agent of the seller, can I promote to the seller the use of a particular exchange agent? There are many opportunities for the auction company to refer business to any number of service providers. Termite inspections, title companies, attorneys, accountants, and more are part of the typical real estate transaction. If you refer business to those sorts of companies, you should feel comfortable establishing a relationship with an exchange company for referrals to them as well.
(Article is continued in Part 3.)
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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange
Ken Tharp
800-805-1031 toll free
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and the Auction Industry (Part 2) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
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