The acquisition and disposition of real property requires a variety of steps. With those steps come required documentation; a paper trail involving forms and legal paperwork to ensure that the transaction is completed to everyone’s satisfaction, without ambiguity or confusion.
The exchange of relinquished property for replacement property via the 1031 exchange also requires documentation. This documentation is required, both to eliminate ambiguities between buyers and sellers, and to demonstrate to the IRS that the exchange meets all requirements. As mentioned before, if the like-kind exchange process isn’t “by-the-book,” exchangers could face an unexpected capital gains tax bill.
So, in addition to the standard documentation that is part of the purchase and sale of real estate, the following documents are part of what can be required for a successful 1031 exchange.
Purchase and Sale Agreement. The purchase and sale agreement is standard documentation in any real estate sale. The difference here, however, is that this agreement must contain language clearly stating that a like-kind exchange will take place. It also specifies that the Qualified Intermediary (QI) will handle all parts of the exchange process.
Exchange Agreement. This written agreement between the exchanger and QI, defines the relinquished property transfer, delineates purchase of the replacement property, and outlines restrictions on proceeds during the exchange period.
Certificate of Citizenship. The Certificate of Citizenship is, as the name implies, a document that proves that the exchanger is a U.S. citizen. This is not to suggest that a foreign entity can’t participate in a like-kind exchange. But an exchanger’s foreign status can create some extra issues and complications, which would need to be addressed.
Form 8824. Appropriately entitled “Like-Kind Exchanges,” the IRS Form 8824 is filed by the annual income tax deadline. The form requires a description of the relinquished and replacement property, acquisition and transfer dates, and other information.
Replacement Property Identification Form. This document is known by other names, such as “Identification of Replacement Property” and “1031 Identification Form.” Regardless of the document’s name, the purpose fulfills the requirement that replacement property/properties must be indicated, in writing, on or before midnight of the 45-day identification period deadline. As such, the document outlines specifics of the replacement property or properties, including the address, name, and fair market value.
Assignment, Acceptance, and Notice of Replacement Property Contract. Also known as the “Replacement Property Assignment,” this document indicates that the exchanger and seller of the replacement property will turn over all replacement property assignments to the QI.
Addendum to Escrow Instructions. This document (also required in standard buy-sell real estate agreements), sets out modifications to previous escrow agreements. This can include changes in the timing of disbursements, or who is responsible for holding escrow funds. Such an addendum is generally signed after the contract has been agreed to.
Final Closing Statement and Deed. Once again, this documentation is used for standard real estate acquisitions and dispositions, as well as like-kind exchanges. The closing statement is a document that outlines the transaction details. The deed, meanwhile, delineates who (or what) now owns the real estate.
Additional Documents -- By State. While standard “must-have” documents come in tandem with a successful 1031 exchange, each state has its own requirements based on its own tax rules and regulations. For example, California requires a FTB Form 593-C, which outlines the date involving the sale or transfer of California real property.
In closing, while the above documents are an important part of a successful 1031 exchange, the requirements can change. As such, before embarking on the like-kind exchange process, be sure to check with your financial or tax advisor to be sure you are following the proper steps, and submitting the proper documentation.