The 1031 Tax Deferred Exchange: Delayed

This Type of Exchange Is Used When:

• Investor has a buyer for the Relinquished Property and is ready to close.
• Investor has not yet located Replacement Property, or
• Replacement Property is under contract but cannot close simultaneously with the Relinquished Property closing.

When the Relinquished Property Is Sold:

• Investor:
  • Contracts to sell the Relinquished Property (using §1031 exchange cooperation clause) and opens escrow (begins the settlement process).
  • Requests Spectrum Exchange Corp. ("Spectrum") to act as Qualified Intermediary.
  • Provides Spectrum with the name and phone number of the escrow/settlement agent ("closer") as well as any file number.

• Spectrum

  • Contacts the closer and requests:

    • Preliminary Title Report/Commitment

    • Sale Contract Agreement/Closing Instructions

  • Prepares for signature:
    • Assignment of the Purchase Instructions which must be executed on or before the closing date by all parties acknowledging Spectrum has accepted the position of seller in the transaction on behalf of the investor. This assignment also authorizes the closer to deed the Relinquished Property directly from the investor to the buyer.
    • Exchange Agreement.
    • Exchange Instructions to closer - designating Spectrum as the seller on documentation created for the investor’s signature after the Assignment has been executed. The settlement statement must reflect Spectrum as the seller and all funds accruing to the seller at closing must be disbursed to Spectrum within 24 hours (delay in disbursement could be construed as "control" by the investor and negate the exchange).

• Upon verification the exchange documentation is fully executed, Spectrum authorizes closing on the sale of the Relinquished Property by instructing closer to record the deed directly from the Investor to the buyer.
• Spectrum is reflected as the seller and executes closing documents upon the Investor’s review and approval.
• Closer wire transfers net proceeds to Spectrum exchange account. Note: The Investor may acquire a portion of the proceeds at closing provided Spectrum is assigned into the contract only as to the percentage to be exchanged, the funds are disbursed at closing (Spectrum cannot disburse after receipt) and the Investor acknowledges those funds will be subject to capital gains taxes.

Time Periods

From Relinquished Property closing date, Investor has:

• 45 days to identify Replacement Property.
• The earlier of 180 days, or the tax filing date, including extensions, to complete the exchange.

Rules of Identification

• 3 Property Rule - The Investor may identify as potential Replacement Property any three properties, without regard to their Fair Market Value.

• 200% Rule - The Investor may identify as potential Replacement Property any number of properties, as long as the aggregate Fair Market Value of the properties does not exceed 200% of the aggregate Fair Market Value of all the Relinquished Properties as of the initial transfer date.

• 95% Exception - If the Investor has identified more properties than permitted under both of the two rules above, the Investor must receive, by the end of the exchange period, property the Fair Market Value of which is at least 95% of the aggregate Fair Market Value of all the properties identified.

Sample Cooperation Clause:  

Buyer acknowledges it is the Seller’s intent to effect an IRC §1031 tax deferred exchange which will not delay the closing or cause additional expense to Buyer. The Seller’s rights and obligations under this agreement will be assigned to Spectrum Exchange Corp., a Qualified Intermediary, for the purpose of completing the exchange. Buyer agrees to cooperate with the Seller and Spectrum Exchange in a manner necessary to complete the exchange. Note: this clause is for Relinquished Property, for Replacement Property reverse Buyer and Seller.

When the Replacement Property Is Located:

• Investor:

  • Contracts to purchase the Replacement Property (using §1031 exchange cooperation clause).
  • Investor notifies Spectrum as to the name and phone number of the closer.
• Spectrum:
  • Requests copies of:
    • Preliminary Title Report/Closer wire transfers net proceeds
    • Purchase Contract Agreement/Closing Instructions
  • Prepares for signature:
    • Assignment of Buyer's position - which must be executed on or before the closing date by all parties acknowledging Spectrum has accepted the position of buyer in the transaction on behalf of the investor. This assignment also authorizes the closer to deed the Replacement Property directly from the seller to the Investor.
    • Exchange Instructions to closer - designating Spectrum as the buyer on behalf of the Investor on the closing statement, authorizing the deed to be prepared and recorded directly from the seller to the Investor and authorizing the investor to execute loan documents. Upon receipt of the fully executed assignment, an estimated closing statement and a written request (48 hours in advance) for funds from the closer, Spectrum authorizes the wire transfer of funds and closes on the purchase of the Replacement Property.
  • Upon acquisition of all Replacement Property, Spectrum will provide the Investor a detailed accounting of funds held during the exchange period.