Knowledge Center
Timing is everything. Exchange transactions require items be completed in a certain order during a strict time frame.
prior to closing the sale of the relinquished property
Prior to closing the sale of the relinquished property, the Exchanger and Tennessee 1031 will enter into an exchange agreement which requires the following:
acquire the relinquished property from the Exchanger and transfer it to the buyer (by direct deed from Exchanger to buyer), and
to acquire the replacement property from the seller and transfer it to the Exchanger (by direct deed from seller to Exchanger).
Also, the Exchanger must assign rights under the relinquished property sale contract to the Qualified Intermediary and provide notice of assignment to the buyer.
Exchange funds
At closing, net proceeds from the relinquished property sale (exchange funds) are paid directly to Tennessee 1031 Exchange to be held in a separate account for the benefit of the Exchanger until used to purchase the replacement property.
exchange deadline
The Exchanger has 45 days, from the date the relinquished property is transferred, to identify potential replacement properties. Identification must be specific, in writing, signed by the Exchanger, and delivered to the Qualified Intermediary or another party to the transaction as permitted by the 1031 Treasury Regulation prior to the end of the 45-day identification period.
The list of identified potential replacement properties cannot be changed after the 45th day; the Exchanger may only acquire from the list of identified properties. If no property is identified, the exchange funds will be returned to the Exchanger after the 45th day.
Closing the sale of relinquished property
The Exchanger must assign rights under the replacement property purchase contract to the Qualified Intermediary and provide notice of assignment to the seller.
Wire funds
The Exchanger authorizes Tennessee 1031 Exchange to wire funds directly to the seller, or closing agent, for purchase of replacement property, and the seller transfers title directly to the Exchanger, completing the exchange.
purchase of replacement property
The purchase of replacement property must be completed before the 180th day after transfer of the first relinquished property, or the due date (including extensions) for filing Exchanger's tax return. Any unspent exchange funds will be returned to the Exchanger at termination of the exchange.
What is a qualified intermediary?
qualified intermediary
The use of a Qualified Intermediary is essential to completing a successful 1031 tax deferred exchange. Investment Property Exchange Services, as a professional Qualified Intermediary, performs several vital functions in an exchange and operates under the "safe harbor" set out in Treas. Reg. 1.1031(k)-1(g)(4). Although the process of completing an exchange is relatively simple, the rules are complicated and filled with potential pitfalls. Tennessee 1031 works closely with all parties to ensure a seamless exchange transaction.
who cannot act as a "qualified" intermediary
A person who has acted as the taxpayer's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two year period preceding the date of the transfer of the relinquished property by the Exchanger is treated as an agent of the Exchanger and is specifically disqualified from being a Qualified Intermediary.
creating the exchange of properties
The IRS stipulates that a reciprocal trade or actual exchange must take place in each transaction. This means the Exchanger must assign to the Qualified Intermediary
their interest as seller of the relinquished property
their interest as buyer of the replacement property
Because the Qualified Intermediary becomes an actual principals in the transaction, a reciprocal trade is created, even when the Exchanger is purchasing the replacement property from someone other than the buyer of their relinquished property. For 1031 purposes, the Qualified Intermediary is treated as acquiring the relinquished and replacement properties when the Exchanger assigns their rights in the respective purchase and sale contracts to the Qualified Intermediary. It is not necessary for the Qualified Intermediary to be in the chain of title.
who holds the exchange funds
The Exchanger is prohibited from having actual or constructive receipt of the proceeds from the sale of the relinquished property (exchange funds), or the ability to pledge, borrow or otherwise obtain the benefits of the exchange funds during the exchange or those proceeds will be taxable as boot.
who prepares the exchange documents
Proper documentation is required for a successful exchange. Tennessee 1031 will prepare an Exchange Agreement, Assignments of Purchase and Sale Agreements, Notices of Assignment to the respective buyer and seller, and provide a blank replacement property identification notice, among other form documents.