The following guest article was written by our friends at Baer Reed, a legal and business support provider. 

The Internal Revenue Code does not set forth any formal requirements or language that must be included in a purchase and sale agreement dealing with a 1031 exchange. However, experienced legal professionals know that implementing certain clauses in the contract (agreements, leases, etc.) can offer the parties protection, facilitate the exchange, and preserve tax-deferred status. Here are some of the best practices for drafting 1031 exchange purchase and sale agreements.

The Contract Should Be Assignable 

A 1031 exchange requires that sale proceeds be transferred to a third party, which is referred to under the code as a qualified intermediary. The purchase and sale agreement must be assignable because the qualified intermediary is to be assigned under the contract as the seller of the relinquished property and as the buyer of the replacement property. If the sale contract has a clause prohibiting assignments, the parties could be barred from moving forward with the 1031 exchange. Therefore, it is essential that the contract be freely assignable and that it does not include a clause expressly prohibiting the parties from assignments. 

Cooperation Clauses 

Although incorporating language referencing a party’s intent to perform a 1031 exchange is not mandatory, including what is called a cooperation clause can be beneficial. A cooperation clause is a clause written into a purchase and sale agreement that in effect establishes the party’s intention to perform a 1031 exchange and puts the other party on notice that the contract may be assigned to a qualified intermediary. The cooperation clause will also bind the other party to cooperate in executing the necessary documents for the 1031 exchange, which will expedite the process. 

Third-Party Review 

Engaging legal review services will ensure that you are incorporating best practices in the 1031 exchange contract process. Our friends at Baer Reed can provide additional support for corporations handling high volumes of contracts, agreements, and leases, that are looking for consistency and efficiency in the closing process. 

For more information, please feel free to schedule time with a Fortitude representative at your convenience here. 

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This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Fortitude Investment Group does not offer legal or tax advice. 

There are material risks associated with investing in real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. 

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. Insurance offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group is independent of CIS, CAM and CIA, all of whom are independent of Baer Reed.