<<Back to Summary

How can you "direct deed" your relinquished property to your buyer or have your seller "direct deed" your replacement property to you? An exchange can be accomplished by sequential deeding: first a deed from you to your qualified intermediary and then a deed from your qualified intermediary to your buyer. On the other end of the exchange for acquiring replacement property, your seller of replacement property can deed replacement property to your qualified intermediary, who then will deed the replacement property to you. Sequential deeding exposes your qualified intermediary to the risks of being in the chain of title to your property. The risks include liability for asbestos and other environmental hazards on your property. Qualified intermediaries are reluctant to accept these risks. Also, sequential deeding results in multiple transfer taxes (imposed on each deed) in many jurisdictions.

Most transfers of property in an exchange involve "direct deeding." This involves you deeding your relinquished property to your buyer rather than to your qualified intermediary; you just skip the deed to the qualified intermediary. In the other direction, it involves the seller of your replacement property deeding your replacement property directly to you rather than to your qualified intermediary; again, you skip the deed to the qualified intermediary. Where you use "direct deeding,"

• for disposing of your relinquished property, your qualified intermediary will enter into an agreement with your buyer for the transfer of the relinquished property to the buyer, or
• for acquiring your replacement property, your qualified intermediary will enter into an agreement with the seller of replacement property for the transfer of that replacement property to you.

Typically, all this requires is for you to assign your rights to sell your relinquished property or to acquire your replacement property to the qualified intermediary. All parties to the agreement must be told in writing of the assignment. Your intermediary never needs to receive title to either the relinquished property or the replacement property.

How do you identify replacement property? You must identify replacement property during the identification period beginning on the day on which you transfer your relinquished property and ending on midnight of the 45th day after that and must acquire replacement property during the exchange period beginning on the day on which you transfer your relinquished property and ending at midnight on the 180th day after that.

You cannot get these deadlines extended, even if the 45th day or the 180th day falls on a Saturday, Sunday, or legal holiday; the 45-day identification period and the 180-day exchange period are not extended to the next business day. There is no provision for waiving the 45th day or the 180th day deadline.

You must identify your replacement property in a signed identification notice that you send by the 45th day. It can be sent by mail, fax, or personal delivery. You may not merely telephone someone and deliver your identification orally.

You must send your written identification notice to your qualified intermediary or any other person involved in the exchange other than a "disqualified person" (a person related to you or working for you). You should send the identification notice to your qualified intermediary. You must sign the identification notice personally. The identification notice is not effective if you do not sign it.

Your identification notice must describe your replacement property by street address or legal description. If you are buying a condominium, you also must give the unit number.

How many replacement properties can you identify? You may want to identify alternative properties in case your chief target falls through. There are three rules that permit you to identify alternative replacement properties. You need to meet the requirements of any one of these three rules. The best rule lets you identify up to three replacement properties and then to acquire any one or more of the three properties that you identified.

The three rules are:

• You may identify any one, two or three replacement properties. Then, you can acquire any of these properties. This is the best identification rule.
• You may identify as many replacement properties as you want, provided that they are worth no more than twice the value of your relinquished property (ignoring any mortgages). You may identify up to $1 million in replacement property if your relinquished property is worth $500,000.
• You may identify as many replacement properties as you want provided that you acquire 95% (by value) of what you identify (ignoring any mortgages). You may identify $1,000,000 in replacement property and acquire only $950,000 in replacement property.

You will have to pay tax on your exchange if you do not meet any of the three identification rules.

Copyright © 1999 Golden Escrow, Inc. All Rights Reserved.
For customer service call 1-888-286-7555 ext. 718 or send E-mail.
Golden Escrow's Privacy policy!