1031 Exchanges - Is An Assignable Contract Necessary?

By
Services for Real Estate Pros with The Law Offices of Elisabeth A. Lambert

YES! 

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

Asset Preservation, Inc. 800.282.1031 or info@apiexchange.com or www.apiexchange.com

 

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Groups:
Realtors®
Commercial Real Estate
Investors
Real Estate Law
The Optimist
Tags:
1031 exchanges
investment property
contracts
contract language
assignability
assignment
exchange agreement
constructive receipt
qualified intermediary

Spam prevention
Show All Comments
Ambassador
962,501
Mike Frazier
Carousel Realty of Dyer County - Dyersburg, TN
Northwest Tennessee Realtor

Lisa,

Thanks for the earlier comment on another post. I am not sure about Tennessee law but I am almost sure our contracts are assignable. I am planning to sell some rental property here and reinvest in florida ina condo.

Jun 12, 2008 07:10 AM #1
Rainer
61,374
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Mike:

I'd be happy to assist you, if you are planning to do a 1031 exchange. We are a National company and work with people all over the United States.

Please don't hesitate to contact me if you have additional questions.

 

Lisa

Jun 12, 2008 08:00 AM #2
Rainmaker
288,806
Tim Bradley
Contour Investment Properties - Jackson Hole, WY
Commercial Real Estate Expert in Jackson Hole, WY

Hi Lisa,

Thanks for making these points. The question of whether a contract is assignable or not comes up regularly in my market, Jackson Hole, WY. Our state law provides that a real estate contract is assignable unless specifically prohibited by language within
the contract itself. Even so, since 1031 exchanges are common here, most agents include a paragraph in Additional Provisions noting that both buyer and seller agree to cooperate with the other to accommodate a 1031 exchange, so long as the other party is not put to any additional expense.

Tim

Jun 12, 2008 03:27 PM #3
Rainer
138,818
Paul Silver
Tiverton, RI
Rhode Island full service real estate firm

Useful... we also deal with many 1031 exchanges in our markets, and find that many people do not understand the nature of such an exchange. Clear and concise, thanks Lisa...

Jun 13, 2008 08:24 AM #4
Rainer
3,721
Jaye Maxx Alexander II
J.M.ALEXANDER,LLC - Charlotte, NC

Thank you for the exchange of information and ideas .. I am on the money side and I loved this article.

Jun 14, 2008 02:18 AM #5
Rainer
61,374
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Tim:

It sounds like Wyoming's contract law is similar to California. Thanks for taking the time to leave a comment.

Lisa

Jun 16, 2008 05:05 AM #6
Rainer
61,374
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Jaye:

Thanks for stopping by an leaving a comment. I really appreciate it.

Jun 16, 2008 05:06 AM #7
Rainer
155,671
R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

I've done a few of these 1031's before, but didn't realize the importance of the contract being assignable.  Thanks for the heads up!

Bob Mitchell

ValueList Real Estate Services, Inc.

Jun 19, 2008 05:02 AM #8
Rainer
61,374
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Bob:

You are so welcome. There are all kinds of details like this that can be overlooked in the 1031 exchange process. I'm glad you found the information useful. Thanks for taking the time to leave a comment.

Lisa

Jun 19, 2008 10:04 AM #9
Ambassador
962,501
Mike Frazier
Carousel Realty of Dyer County - Dyersburg, TN
Northwest Tennessee Realtor

Lisa,

I appreciate the offer to assist. I will be selling in Tennessee and buying in Florida. Is it correct in a 1031 exchange that I have 45 days from the close of sale to locate 3 possible properties to then purchase? Also, after say 10 days if one of those properties sells, can I then substitute another property in its place and just have 35 days left to enter into a contract to purchase one of those 3 properties?

Jul 17, 2008 08:29 AM #10
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainer
61,374

Lisa Lambert

Esq. 1031 Exchange Expert
Ask me a question
*
*
*
*

Additional Information