In this 1031 FAQ video, Jeff Peterson talks about direct deeding in a 1031 exchange. Watch more 1031 educational videos here.
In a 1031 exchange the relinquished property is typically conveyed directly from the taxpayer or exchanger to the buyer. That's called direct deeding because the taxpayer deeds the property directly to the buyer.
In order to avail yourself of direct deeding you need to have assigned the rights in the sale contract for the relinquished property to your intermediary.
In the olden days the taxpayer would actually physically convey the relinquished property to the intermediary, and then the intermediary would deed it to the buyer. But that extra recording was cumbersome and unnecessary so the IRS now allows for direct deeding, but they extracted a concession.
They said if you are going to use direct deeding, you have to assign the rights in the sales contract to the intermediary, and further you have to give notice to any other parties to that contract that you've assigned your rights to the intermediary. Thus, we’ll have a notice of assignment that will be signed by the buyer of the relinquished property as well as any other party.
The same goes for the replacement property. The seller of the replacement property will typically deed the replacement property directly to the taxpayer that's doing the exchange. And the taxpayer doing the exchange will assign to the intermediary their rights in the purchase agreement for the replacement property.
Again, we have to give notice to the seller, as well as any other parties that replacement property purchase contract that the exchanger is assigning their rights to the intermediary. The prudent thing to do is to get something signed by the other parties stating “yes I received this notice.” Then you’ll have that just in case you’re ever audited.
For more information on assigning your rights to your qualified intermediary and giving written notice to the other parties, check out our previous article.
- 1031 Hotline: If you have questions about direct deeding in a 1031 exchange, feel free to call me at 612-643-1031.
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