RELINQUISHED SALE READINESS

A qualified intermediary should be engaged before the purchase and sale contract is signed, or at minimum well before the closing date is finalized. The exchange agreement and assignment of contract rights must be in place before the deed records, because proceeds received directly by the seller, even briefly, generally disqualify the exchange. Investors in Boston, MA who wait until the week of closing to engage a qualified intermediary risk a rushed setup that increases the chance of a documentation error.

Actual or constructive receipt of exchange proceeds by the taxpayer, even for a short period, generally disqualifies the exchange under the doctrine of constructive receipt. This is true whether the funds land in the seller's own account by mistake or the seller has the unrestricted right to demand the funds from an escrow arrangement. Readiness planning confirms the qualified intermediary agreement and escrow instructions are properly executed before closing so this risk does not materialize.

Depreciation recapture taxes the portion of gain attributable to depreciation deductions taken over the ownership period, generally at a rate up to twenty-five percent for real property, separately from the remaining capital gain. A property held for a decade or more can carry significant recapture exposure. A properly structured 1031 exchange defers both the recapture tax and the capital gains tax on qualifying replacement property, which is one reason readiness planning includes a review of the depreciation schedule before listing.

Generally yes. The same taxpayer that held title to the relinquished property must take title to the replacement property for the exchange to qualify, with limited exceptions such as certain disregarded single member LLCs. Readiness review confirms the vesting entity on the sale side matches the intended acquisition entity before closing, since correcting a mismatch after the sale has closed is far more difficult than addressing it during pre-sale planning.

Purchase and sale contracts should include cooperation language confirming the buyer will cooperate with the seller's like-kind exchange at no additional cost or liability to the buyer, along with an assignment provision permitting the seller to assign contract rights to a qualified intermediary. Readiness review checks that this language is present before the contract is signed, and coordinates with the closing attorney to add it if it has been omitted from a standard form contract.