1031 Exchange Fictions

The current 1031 exchange treasury regulations that were issued in 1991 are designed so that the taxpayer is not considered to be in receipt of the sales proceeds. The fiction is that the intermediary insulates the taxpayer from receiving anything but like-kind property (assuming the exchange is done correctly). The intermediary holds the money, but that holding of the money has to be pursuant to a written exchange agreement signed by the taxpayer and the intermediary. That exchange agreement has to contain limitations (sometimes referred to as the G(6) limitations), which are the modern iteration of the idea that you can’t get your hands on the 1031 exchange funds while they’re being held by the intermediary.

Direct Deeding

Another 1031 exchange fiction is the “direct deeding” fiction. Back in the old days (pre-1991), if the qualified intermediary was the seller of the relinquished property, you may have deeded your relinquished property to your intermediary acting as your escrow agent and the escrow agent would have sold the relinquished property directly to the buyer by deed. That extra deeding was unnecessary and burdensome, so in the 1991 regulations they came out with the idea of direct deeding wherein there would simply be a deed from the taxpayer conveying the relinquished property to the buyer, but there will have been an assignment to the intermediary of the seller’s rights in the relinquished property sale. That assignment wasn’t considered effective unless there was written notice given to the other parties involved.

So when we say we want to correctly identify the names of the parties on the settlement statement, that’s all in an effort to fully comply with the treasury regulations.

CPEC1031, LLC – Qualified Intermediaries

When you’re doing a 1031 exchange, you want to have a like-kind exchange professional by your side to guide your decision making. CPEC1031, LLC focuses solely on 1031 exchanges of investment real estate. Our qualified intermediaries are ready to help you through all the specific details of your next 1031 exchange of real estate. Contact our team today to learn more about the like-kind exchange process, its benefits, and to see if your property qualifies for like-kind exchange tax deferral.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

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