Notification of other party

Conclusion: Real Estate Exchangors should beware of disclosing to the other Party that their property is involved in a 1031 exchange at an inopportune moment.

Notification of Other Party

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It's important to Notify the other party to a sales contract that they are engaged in a Section 1031 Exchange, but this can cause problems.

When representing a buyer in an exchange, use of the Exchange Addendum as part of the purchase contract potentially puts the purchaser at a distinct disadvantage when it comes to negotiating a purchase.

Imagine a seller who receives an offer with the Exchange Addendum attached thereto.

The seller is aware immediately that their property is one of only three properties identified as potential target properties by the buyer and, the seller can also surmise that the buyer is under additional pressure to purchase replacement property soon.

A seller with knowledge that the purchaser is engaged in a section 1031 exchange can extract additional concessions from the purchaser as closing approaches knowing that the purchaser is beyond his identification period and is committed to going forward with the purchase of just this property or suffering a large tax liability.

Regulations under section 1031 do require notification of the exchange to the other parties to the transaction.

However, this regulation does not state when or how the notification must be given.

A notice should be sent stating "notice" that a section 1031 exchange is occurring to the other parties AT CLOSING and not before hand.

This is a better practice than providing this notice during negotiations.

As long as the standard language, which prohibits buyers from assigning their beneficial interests, is eliminated from the contract then notification of 1031 exchange AT CLOSING is sufficient under section 1031.

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