In a 1031 exchange, typically the purchase agreements for the sale of the relinquished property or the purchase of the new replacement property are assigned to the intermediary by the taxpayer that's doing the exchange.
Old English Common Law
Under the Old English common law, an assignment was not considered effective until all of the parties to the contract were given written notice of the assignment. The IRS has adopted this Old English concept and in the context of a 1031 exchange when the seller of a relinquished property assigns their rights in the relinquished property purchase agreement to their intermediary, that necessitates the seller giving notice to the buyer of the relinquished property as well as any assignee, or parties that were assigned rights in that contract.
Well sometimes that's easy to do and sometimes it's hard to do because the buyer that's actually purchasing the property may or may not be affiliated with the original contracting party and it's sometimes difficult to track down all of the parties to the contract and give them written notice.
The same thing goes on the replacement property. When you contract with the seller of the replacement property and then assign your rights in that purchase agreement to the intermediary, you must give written notice to that seller. There is often less rigmarole and assignments of the replacement property purchase agreement but nevertheless, if there are any other parties in that purchase agreement the treasury regulations require that the taxpayer give those other parties written notice of the assignment to the intermediary.
Making it Happen
So how do you make sure that you get that written notice proved up? You ask those other parties to sign an acknowledgement that they received written notice. How do you make sure that these other parties do that and give you the written proof? You make it a contractual requirement in your purchase agreements that ALL of the other parties will cooperate and will provide you with that requisite acknowledgment at or prior to closing.
For a sample 1031 cooperation clause, check out this link.
- 1031 Hotline: If you have questions about 1031 purchase agreements and cooperation clauses, feel free to call me at 612-643-1031.
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