Why Do I Have to Assign My Purchase Agreement to My Qualified Intermediary?

(Listen Here 3:35 min)

Many people ask “Why do I have to assign my purchase agreement to my Qualified Intermediary?” Even more, they ask “Why do I have to give notice that I am assigning my contract to my intermediary to all of the other persons involved in the purchase agreement?” It seems intrusive to have to give everyone notice that you are doing and exchange. Why is it anyone’s business?

Old School Requirements

Let’s go back in time before the current Treasury regulations were in place. We would actually deed or transfer our property to the Intermediary. The Intermediary acted as a straw man, so that they became the seller of the relinquished property and the purchaser of the replacement property. So, your Intermediary actually went into title and then participated in the transfer or the purchase of the property.

Modern 1031 Tax Techniques Allows Mere Assignment

Thankfully, today, our Intermediaries do not have to legally take title. We can accomplish the same function by simply assigning to the Intermediary our rights in the relinquished property purchase agreement, or our rights in the replacement property purchase agreement, and that is deemed to be the same as if the Intermediary actually took our property from us, or received the replacement property for our benefit.

Faster, Cheaper…Direct Deeding for 1031 Exchanges

The benefit here is that we do not have to deed a property. We do not have to pay for extra recording fees, and we do not have to go through all of that extra hassle of actually deeding the intermediary into the chain of title. However, the Treasury regulations say that if you are going to have direct deeding, that is the exchanger deeds the relinquished property to the buyer, and the seller of the replacement property deeds the replacement property to the exchanger. Then, we have to give written notice of this assignment to the Intermediary to all of the other parties to the purchase agreement. Remember, in old common law, an assignment was never considered effective unless all of the parties to that agreement were given notice.

Why Would the IRS Adopt an Old Common Law Assignment Rule

And so, the Treasury regulations sort of adopted this old rule. And, I think that is perhaps so that unscrupulous folks can’t fabricate an exchange. They can’t say “You know that deal that we did back last year?  That was a 1031 exchange.” The way to catch them in that lie would be to say, “Well, show us where you gave written notice to the other parties of the purchase agreement.” If they can’t show, well then maybe it wasn’t a 1031 from the outset.

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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