What is a 1031 Exchange Addendum, and How Does it Work?

Posted May 25, 2023


Many 1031 exchange contracts have all the necessary language to complete the exchange. However, there are times when modified or new language must be introduced after the fact. This article will look at a few scenarios where a 1031 exchange addendum is needed.

When to Use a 1031 Exchange Addendum?

A common scenario for using an addendum is assigning a qualified intermediary (QI). The specific property and QI are both described in the addendum. Adding this information to an addendum allows the exchange to proceed.

But isn’t the QI already mentioned in the 1031 exchange contract? Multiple documents compose what might be called a 1031 exchange contract. At some point, the QI may be mentioned in one of these documents. However, when the QI hasn’t been mentioned, an addendum can be used to formalize the QI so the exchange can be completed.

An Exchange Cooperation Clause is another reason to use an addendum. This clause is basically a liability release for the seller. It states that the buyer will not hold the seller responsible for costs, claims, liabilities, or delays related to the exchange. In the same addendum, the seller will also state the name of the QI if one hasn’t already been mentioned.

Escrow instruction modifications require an addendum after the contract has been agreed to. Escrow instruction changes can include changes in the timing of disbursements or who is responsible for holding escrow funds.

When an offer is received on the property, a relinquished property addendum may be created. This addendum signifies intent to use the property in a 1031 exchange. At this point, the buyer and their agent are formally made aware of such an exchange. The seller can also assign a QI to the exchange in this addendum.

A 1031 exchange addendum is used to add any clarifying language to a 1031 exchange. It may also be used as a means of formalizing language. Rather than re-drafting the existing documents, in some cases, an addendum can be used. As outlined above, there are specific scenarios to use the addendum as well.

It’s best to work with your realtor when deciding if an addendum is needed, as not every 1031 exchange will require an addendum.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

Hypothetical examples shown are for illustrative purposes only.

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