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HANDLING 1031 EXCHANGES

by | May 20, 2022 | Contracts and Forms

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

 

Q:  I am a listing agent on a rental property which the Seller wishes to exchange.  We are in escrow and the date for COE is rapidly approaching.  My Seller is having trouble finding an up-leg exchange property.  The Purchase Agreement provides: “Buyer to cooperate in Seller’s 1031 exchange at no cost or liability to Buyer.”  Seller now says he doesn’t have to close because he can’t find a suitable exchange property.  Buyer has an attorney who says Seller must close or be in default.  What do we do?

 

A:  In any situation where a clause in a contract is not clear as to its effect, agents should advise their client to consult with a qualified California real estate attorney for advice on how to proceed.

 

This is a common problem which arises when Seller is engaging in a tax-deferred exchange and the above clause is used.  Is this clause a contingency in favor of Seller?  Or is it just an agreement binding Buyer to cooperate if Seller’s exchange is completed?  What if Seller can’t find an exchange property or the up-leg escrow cancels?  The clause as written in the contract does not address these important issues.

 

The situation is the same for Buyers who are engaging in an exchange and a similar clause is used for Seller to cooperate in Buyer’s exchange.  What if Buyer can’t sell Buyer’s down-leg property?  What if Buyer’s down-leg escrow cancels?  Can Buyer, therefore, cancel the subject escrow?

 

Such ambiguity created by the above language could even lend itself to an argument by one of the parties that the contract is uncertain as to the obligations of the parties and therefore unenforceable.  It is important to address these issues up front, in writing, and at the time the contract is ratified to avoid conflicting expectations later.

 

FORMS:  The above problem can be avoided by using one of the two excellent forms for this purpose:

 

            Buyer’s Intent to Exchange Addendum (CAR Form BXA). 

            Seller’s Intent to Exchange Addendum (CAR Form SXA)

           

PRACTICE TIPS: 

  1. Do not allow a contract to be accepted with language regarding a party engaging in a 1031 Exchange and the other party agrees to cooperate, etc. Instead, be sure that the accepted contract has either the BXA or SXA addendum, as appropriate.
  2. As a Buyer’s agent:
  3. Use Form BXA if your Buyer wishes to engage in an exchange.
  4. Counter with Form SXA if Seller counters that he/she is engaging in an exchange and has not used this or a comparable form.
  5. As a listing agent:
  6. Counter with Form SXA if your Seller desires an exchange.
  7. Counter with Form BXA if Buyer is exchanging and the above language or some variation was not used in the offer.
  8. Do not give legal or tax advice relating to a 1031 exchange.  It is imperative that parties undertaking 1031 exchanges have their own legal counsel and accountants as it is a very complicated area of the law and if there is a misstep, the consequences can be extreme.
  9. If a Buyer is using 1031 exchange money and the Seller defaults, the damages can be significant since the Seller can incur large tax consequences

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATTORNEY-CLIENT PRIVILEGED COMMUNICATION. Do not forward to Sellers, Buyers or third parties. This Broker Alert is for the exclusive use of clients of Broker Risk Owners and Management. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk
management practices