This issue has come up twice this week. Once on an AR blog and once in the course of my business. So here you go. . .
When a client selects a Qualified Intermediary (QI, accommodator, facilitator) and decides to open an exchange account a number of contractual things need to happen before the QI is ready to accept the clients funds from the sale of the property.
1. The Seller (client/taxpayer) will sign an exchange agreement, which essentially prevents them from having the ability to pledge, borrow or otherwise receive the benefits of the sale proceeds during the exchange period except for the purchase of Replacement Property.
2. The Seller assigns the Purchase/Sale Contract to the QI, so that the QI can step into the shoes of the seller and accept the sale proceeds. This prevents the client from having actual or constructive receipt of the proceeds, which would disqualify the exchange.
3. The Seller will notify the Purchaser of the Assignment through a Notice of Assignment.
4. The QI will provide a Security of Funds Instrument. See my blog entry on API's Security.
STATE LAW AND ASSIGNABILITY
Every state has their own body of contract law. For example, in California, contracts are freely assignable unless there is a contractual provision specificly limiting or prohibiting assignability. In other states, contracts are presumed to be unassignable unless there is a specific provision permitting assignability. You must check with your state to be sure.
(Note to California Realtors: the C.A.R. Residential Contract does not limit assignability, however, the C.A.R. Commercial Contract requires an agreement of the parties for assignment.)
The following language may be used to accomplish three things (ALWAYS CHECK WITH YOUR BROKER OR COUNSEL PRIOR TO MODIFYING A CONTRACT)
1. Intent to effect a 1031 Exchange
2. Release the Buyer from any liabilties or costs resulting in the Exchange;
3. Notify the Buyer in writing of the Assignment
"Buyer is aware that Seller intends to perform an IRC Section 1031 tax deferred exchange. Seller requests Buyer's cooperation in such an exchange and agrees to hold Buyer harmless from any and all claims, costs, liabilities, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract to Asset Preservation, Inc. by the Seller." Copyright 2008. Asset Preservation, Inc. All Rights Reserved
So, if you have a Seller, who is doing a 1031 exchange and you live in a state where contracts are not freely assignable you will have to (with assistance, at least the first time, from your Broker or Counsel) modify the contract to permit the contract to be assigned to the QI.
THIS INFORMATION IS PROVIDED FOR EDUCATION AND INFORMATIONAL PURPOSES ONLY. IT IS NOT TAX AND/OR LEGAL ADVICE. INDIVIDUALS ARE STRONGLY ENCOURAGED TO SEEK THE ADVICE OF THEIR OWN TAX AND LEGAL COUNSEL TO REVIEW THEIR INDIVIDUAL FACTS AND CIRCUMSTANCES.
Lisa A. Lambert, Esq. 877.646.1031 or LisaL@apiexchange.com