Prior to 1991, in a 1031 tax-deferred exchange, a seller would deed a property to an intermediary who then deeded the property to a third-party buyer, known as sequential deeding. Now, there is the option for the seller to deed to property directly to the buyer, known as direct deeding.
There were drawbacks to sequential deeding when it was the only way to transfer a tax-deferred property. Mainly, it made the process more complicated and lengthy than necessary. It was also more expensive. Because of this, the Internal Revenue Service (IRS) approved the use of direct deeding for some 1031 exchange real estate transactions.
With direct deeding, you still use an intermediary. But instead of getting the deed to a property, the intermediary is only assigned the rights to the property in the purchase agreement. All parties, both the buyer and seller, should be notified in writing and sign an acknowledgement that an intermediary is being used.
Direct deeding is used in many cases for both a relinquished property and a replacement property in a 1031 exchange. When a property is relinquished, you might be able to direct deed the property to the buyer. In turn, when buying a replacement property the seller of the replacement property might direct deed the property to you. This makes the process less cumbersome than the old process of sequential deeding.
In direct deeding, and when choosing an intermediary, there are a few things to consider:
- Choose a qualified intermediary who has relevant experience.
- Ensure that all parties are notified in writing and acknowledge the assignment of an intermediary.
- Consult a tax professional to ensure you are following the correct procedure for direct deeding of your 1031 exchange.
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. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits.