Bayit Exchange: the qualified intermediary in your 1031 exchange

Bayit Exchange Company is a qualified intermediary in like-kind exchanges under section 1031 of the Internal Revenue Code, and it is affiliated with Bayit Title. We say so here rather than leave the shared name to say it for us.

The two do different jobs, and keep them apart. Bayit Exchange signs the exchange documents and holds the money between the closings. Bayit Title closes sales and purchases in Florida and insures the titles. It does not act as a qualified intermediary, and it does not hold exchange money between the closings.

You may use any qualified intermediary you choose. We close the same way whichever one it is, and using Bayit Exchange is never a condition of closing with us. Whether to exchange at all, and whether a property qualifies, is a question for your CPA or tax counsel, not for either company.

Anywhere in the United States. Bayit Exchange takes exchanges of property in any state, and the property you sell and the property you buy can be in different states. What cannot be exchanged for property in the United States is property outside it: the two “are not property of a like kind” (26 U.S.C. § 1031(h)).

Bayit Exchange is the intermediary whoever closes. Bayit Title closes in Florida, in every county. Anywhere else, or wherever you would rather use someone else, Bayit Exchange works with the title or escrow company closing each side, and the steps below are the same with any of them.

It stands between your sale and your purchase. A qualified intermediary is a person who is not the taxpayer or a disqualified person, and who “enters into a written agreement with the taxpayer (the ‘exchange agreement’) and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer” (Treas. Reg. § 1.1031(k)-1(g)(4)(iii)).

The reason to have one is the money. If you actually or constructively receive the full proceeds of the sale before you receive the replacement property, “the transaction will constitute a sale and not a deferred exchange” (§ 1.1031(k)-1(f)(1)). A qualified intermediary is not treated as your agent (§ 1.1031(k)-1(g)(4)(i)), so the proceeds it holds are not treated as yours, but only if the exchange agreement expressly limits your rights to receive, pledge, borrow or otherwise obtain the benefits of that money (§ 1.1031(k)-1(g)(4)(ii)).

It does not have to take title. Bayit Exchange is treated as acquiring and transferring each property when your contract for it is assigned to Bayit Exchange, every party to the contract is told of the assignment in writing on or before the closing, and the property is then transferred under that contract (§ 1.1031(k)-1(g)(4)(iv)–(v)). So the deed at the sale runs from you to your buyer, and the deed at the purchase from your seller to you.

In a forward exchange, where you sell first and buy second:

1. Before the sale closes. You sign the exchange agreement with Bayit Exchange. Your sale contract is assigned to Bayit Exchange, and the buyer is told of the assignment in writing on or before the day of the closing (§ 1.1031(k)-1(g)(4)(v)). The agreement has to be in place before the sale closes: once you have had the proceeds, there is no exchange left to set up.
2. At the sale. The settlement statement shows the net proceeds payable to Bayit Exchange, and the closing agent wires them from its trust or escrow account to the account Bayit Exchange has opened for your exchange. The day of the sale is day 0 for both deadlines.
3. By day 45. You identify the replacement property in “a written document signed by the taxpayer”, delivered before the end of the period to a person involved in the exchange other than you or a disqualified person (§ 1.1031(k)-1(c)(2)). You send it to Bayit Exchange. The period “ends at midnight on the 45th day” (§ 1.1031(k)-1(b)(2)(i)).
4. Before the purchase closes. Your purchase contract is assigned to Bayit Exchange, and the seller is given written notice of it, on the same rule as at the sale.
5. By day 180. Bayit Exchange wires the exchange money to the closing agent for the purchase, and the deed runs from the seller to you (§ 1.1031(k)-1(g)(4)(iv)(C)). The exchange period ends at midnight on the 180th day, or on the due date of your return for the year of the sale, with extensions, if that is earlier (§ 1.1031(k)-1(b)(2)(ii)).

Money left over after the purchase is paid to you under the exchange agreement. It is not like-kind property, and gain is recognized up to its amount (26 U.S.C. § 1031(b)). The deadlines, what counts as identification and how many properties can be identified are all in the Florida 1031 exchange closing guide. They are federal rules, and apply wherever the property is; how a state taxes the exchange is a question for your tax adviser.

In an account Bayit Exchange opens for your exchange alone, apart from its own money and from every other client’s. It stays there until it is wired to the purchase closing.

The exchange agreement limits when it can come out, as the regulation requires. You can have no right to the money before the end of the exchange period except in three cases the agreement may provide for (§ 1.1031(k)-1(g)(6)):

• after the end of the 45 days, if you have identified no replacement property;
• once you have received all the replacement property you are entitled to under the agreement; or
• after the end of the 45 days, on a material and substantial contingency that relates to the exchange, is provided for in writing, and is beyond the control of you and of any disqualified person other than the one obliged to transfer the replacement property to you.

Where Bayit Title closes the sale, we wire the proceeds to Bayit Exchange only on wiring instructions we have verified with it by phone, on a number we find ourselves, as we do with any intermediary. How an intermediary holds the money is a fair question to ask of any of them, ours included.

Four:

• Forward, or delayed. You sell first, then buy within the 45 and 180 days. The steps above are this one.
• Simultaneous. Both closings on the same day. Bayit Exchange still takes the assignments and moves the money, and is not treated as your agent in a simultaneous exchange either (Treas. Reg. § 1.1031(b)-2(a)).
• Reverse. You buy the replacement before the old property sells. An exchange accommodation titleholder, who is not you or a disqualified person, holds title in the meantime. The written agreement with it is due within five business days after it takes title, the property to be sold has to be identified within 45 days, and the arrangement can last no more than 180 days in all (Rev. Proc. 2000-37, § 4.02). It does not cover replacement property you owned in the 180 days before the titleholder took title (Rev. Proc. 2004-51).
• Improvement, or build-to-suit. The titleholder holds the replacement property while improvements are built on it, and you may supervise the work (Rev. Proc. 2000-37, § 4.03(5)). What counts as replacement property is what has been built by the day it is transferred to you; construction after that is not like-kind property (§ 1.1031(k)-1(e)(3)(iii), (e)(4)).

In a reverse or an improvement exchange the titleholder takes title, so it is the titleholder the deed, the commitment and the policy name at that closing, and there is a second deed later, from the titleholder to you. Tell Bayit Exchange, and the closing agent, at the start if the exchange will run either way.

The regulation asks who the intermediary is to you, not to the closing agent. A disqualified person is your agent, which includes anyone who has acted as your “employee, attorney, accountant, investment banker or broker, or real estate agent or broker” in the 2 years before the sale, or a person related to you or to such an agent (§ 1.1031(k)-1(k)(2)–(4)). Routine “title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company” are not counted (§ 1.1031(k)-1(k)(2)(ii)).

Whether that settles it on your exchange, if Bayit Title or anyone connected with it has done other work for you, is a question for your tax adviser, and one to ask before the sale closes.

Before the sale closes, and as soon as the sale contract is signed if you can: the exchange agreement and the assignment have to be signed before the closing, and the buyer told in writing.

To start one with Bayit Exchange, email coordinator@bayitexchange.com.

Tell the closing agent on each side that the sale or the purchase is part of an exchange, and that Bayit Exchange is the intermediary, so the assignment and the notice are in its closing package. If Bayit Title is closing in Florida, tell us when you send us the contract.