Direct deeding is an option available for those that are buying or selling property under the 1031 Tax Deferred Exchange. With direct deeding, the seller can direct deed the property to the buyer, rather than having to go through an intermediary, which was once the only way that it could be done with 1031 tax deferred exchanges.
Prior to an IRS ruling in 1990, a seller of property would deed the property to an intermediary and this intermediary in turn would deed the property to the buyer. This was called sequential deeding and was the only way that deeding could be done. It was no longer necessary to do it this way after 1990 and now, direct deeding is much more common than sequential deeding.
This could be because of the advantages that are attached with direct deeding. Direct deeding greatly reduces the risk to intermediaries that actually hold title for a short period of time. This reduces their liability should concerns come up with the property that they would then need to have taken care of, which could cost them time and money. Direct deeding also makes sure that there is no payment of duplicate tax transfers, which are usually charged every time a deed is recorded.
While sequential deeding was there to protect, there are many ways that one can ensure that they will be protected with direct deeding as well. When a seller is using a qualified intermediary, the intermediary should have an agreement with the buyer concerning the property that is about to be sold. If a person is buying property, they should make sure that the intermediary has the same type of agreement with the seller that will allow for the property to be transferred to them.
Using a professional intermediary does have many advantages. Because they are usually affiliated with a title or escrow company, they can take care of all the services concerning closing, title insurance, escrow services and the preparation of many documents that will help make the transfer easier. By using an intermediary, one can also reduce the risk of liability for the structure of the exchange and also any tax consequences. This protects the individual from more liability and also provides documentation in the way of agreements, should disputes arise. If one decides that using an intermediary is for them, all parties that have a part of the agreement need to be informed in writing of this decision.
There are tax regulations associated with a tax deferred exchange and for this reason, one must make sure that they are familiar with these regulations to make sure that the transaction qualifies. The regulations will explain how to identify the replacement property as well as the number of properties that can be identified, how the exchange should be structured, how a deed can be direct deeded to the buyer, how one can receive cash that they may choose to not invest in the replacement property, how interest can be earned on the exchange transaction, and how to deal with closing and other costs associated with the transaction.
Jeffrey G. Funk, P.A.
Realty Executives Central Florida
7932 West Sand Lake Road • Suite 302
Orlando, FL 32819