1031 Exchange Cooperation Clause
(Forward)

Summary

This clause is for use in a commercial purchase and sale agreement when the seller intends to structure the transaction as the first step of an exchange under Section 1031 of the Internal Revenue Code of 1986 (26 USCS § 1031) (1031 Exchange) and its regulations and procedures. This particular clause may be used in any jurisdiction and does not favor either party. This clause contains optional clauses and drafting notes. For a full listing of key content covering construction subcontract agreements, see Construction Subcontract Agreement Resource Kit. For a full listing of key content covering purchasing and selling commercial real estate, see Purchasing and Selling Commercial Real Estate Resource Kit. A 1031 Exchange is also known as a tax-free exchange because capital gain on the sale of like-kind property is not recognized for the purposes of paying capital gains tax if certain requirements are met and rules are followed. There are two different kinds of 1031 Exchange transactions: forward exchanges and reverse exchanges. The party taking advantage of the 1031 Exchange structure is typically known as the exchangor, the property being sold is known as the relinquished property, and the identified like-kind property is called the replacement property. The exchangor uses a qualified intermediary to hold the net proceeds (also called the exchange funds) during the exchange period so a safe harbor is created. This clause is not intended to provide a detailed explanation of the many requirements, nuances, and types of 1031 Exchange transactions. For detailed information on 1031 Exchanges see Real Property 1031 Exchanges, Commercial Purchase and Sale Agreement (Long Form), 5A Real Estate Financing § 8.01 (2018), and 25 Current Legal Forms with Tax Analysis § 21.12 (2018). See 1031 Exchange Cooperation Clause (Reverse) for a clause for use when the first step of the 1031 Exchange involves the acquisition of the replacement property before the disposition of the relinquished property is accomplished. For a full list of key content pertaining to exchanges of real property under Section 1031 of the Internal Revenue Code, 1031 Like-Kind Exchange Resource Kit.