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How can you receive interest on your exchange balance?Some authorities questioned whether it was permissible to pay interest on the exchange balance between the time of the transfer of relinquished property and the acquisition of replacement property. The tax regulations tell you that this is OK. You may receive interest, provided that your interest depends upon the length of time elapsed between transfer of the relinquished property and receipt of the replacement property. You may not actually receive this interest until the end of the exchange, the time at which you can "cash out" the exchange (see previous section).

How do you handle closing and other transaction costs? You will frequently have transactional expenses that you want to pay out of the exchange balance held by your qualified intermediary. The tax regulations permit a limited set of transactional expenses to be paid out of the exchange balance prior to the end of the exchange. The tax regulations permit the following expenses to be paid out of the exchange balance:

• Items that you may receive as a consequence of the disposition of property and that are not included in the amount realized from the disposition of property (e.g., prorated rents), and
• Transactional items that relate to the disposition of the relinquished property or to the acquisition of the replacement property and appear under local standards in the typical closing statement as the responsibility of a buyer or seller (e.g., commissions, prorated taxes, recording or transfer taxes, and title company fees).

What should be in your agreement with your buyer of relinquished property and your agreement with your seller of replacement property? Your buyer of relinquished property and your seller of replacement property do not automatically have to cooperate with you in closing your sale of your relinquished property as an exchange. This makes it important for your agreements with your buyer and your seller to contain an "exchange cooperation clause." Many contracts say something like this: "At Seller's option and at no loss, cost, liability or expense to Buyer, Buyer agrees to cooperate with Seller in closing this transaction as a like-kind exchange under Section 1031 of the Internal Revenue Code." This language does not tell your buyer what he is supposed to do to cooperate in your exchange. It can lead to confusion and disputes.

Your "exchange cooperation clause" should tell your buyer or seller precisely what he is expected to do. Usually, this involves permitting you to assign your agreement to your qualified intermediary and for your qualified intermediary to become substituted for you as a party to the transaction. The following language is a more thoughtful "exchange cooperation clause" to use with your buyer:

"Buyer and Seller agree that Seller may substitute an intermediary ('Intermediary~) to act in place of Seller as the seller of the property. Intermediary shall be designated in writing by Seller. Upon identification of Intermediary, Intermediary shall be substituted for Seller as the seller of the property. Buyer agrees to accept the property and all other required performance from Intermediary and to render its performance of all of its obligations to Intermediary. Buyer agrees that performance by Intermediary will be treated as performance by Seller, and Seller agrees that Buyer's performance to Intermediary will be treated as performance to Seller. Seller shall unconditionally guarantee the full and timely performance by Intermediary of each and every one of the representations, warranties, indemnities, obligations and undertakings of Intermediary. As guarantor, Seller shall be treated as a primary obligor with respect to these representations, warranties, indemnities, obligations and undertakings, and, in the event of breach, Buyer may proceed directly against Seller on this guarantee without the need to join Intermediary as a party to any action against Seller. Seller unconditionally waives any defense that it might have as guarantor that it would not have if it had made or undertaken these representations, warranties, indemnities, obligations and undertakings directly. In the event of the breach of any representations, warranties, obligations and undertakings by Seller or Intermediary or in the event of any claim upon any indemnity of Seller or Intermediary (whether the representation, warranty, indemnity, obligation or undertaking is express or implied), Buyer's exclusive recourse shall be against the Seller; Buyer shall have no recourse (any type against the Intermediary arising from this transaction."

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