A 1031 Exchange is a great tool for real estate investors who are looking to defer their capital gains taxes. However, there are a few things you should know before you try to do one.
First, you must have a qualified intermediary in order to complete the exchange. Second, you must take steps to engage in a 1031 Exchange from the very start of your real estate transaction. You can't just sell your property and decide to utilize a 1031 Exchange "down the road."
Part of ensuring this happens is disclosing that your property will be part of a 1031 Exchange in your listing agreements and when you sign a contract with a potential buyer. One helpful strategy to ensure this is done (and done correctly) is to include a Cooperation Clause in your contract. This is especially important to consider if your state's standard agreement of sale does not have a place on it to indicate that your property is part of a 1031 Exchange.
What Is a Cooperation Clause?
Essentially, the Cooperation Clause informs the other party of the transaction that you are doing a 1031 Exchange and explains what that means for them as the buyer. The language we frequently draft lets the buyer know that they will be required to sign some extra documents at closing, but it doesn't cost anything or place any additional liability on the buyer. They are simply required to take these steps in order to facilitate the transaction.
If you would like to see a sample of the specific language we use in our Cooperation Clause, please email [email protected] and we'd be happy to send you a copy.
Back to Step One
At the beginning of this post, we mentioned that the very first step of starting a 1031 Exchange is to hire a qualified intermediary who can assist you with the process. At Brazos1031 Exchange, we are able to serve as Qualified Intermediaries for clients anywhere in the United States. If you'd like to learn more about how we can assist you with your transaction, please contact us at (888) 508-1901.