Making Your Exchange Escrow Transaction Run Smoothly
Q. What do I do when I am notified that a party to my escrow intends to do a 1031 Tax-Deferred Exchange?
If you are notified, either verbally or in the Purchase Contract, that a principal wants to do an exchange, you must include the “Exchange Intent Clause” in your escrow instructions (i.e. Buyer agrees to cooperate with Seller…or Seller agrees to cooperate with Buyer…or Buyer and Seller agree to cooperate with each other…). Monarch Title Company, Inc. is pleased to provide you with sample language if your company needs it.
Remember, if you have placed an “Exchange Intent Clause” in your escrow instructions and are subsequently notified that your principal will not be doing an exchange, you must prepare an amendment deleting that clause from your escrow so it does not appear as if you closed and forgot to do the exchange.
Q. When do I need to notify the Exchange Intermediary Company of my escrow?
Typically, you will contact Monarch Title Company, Inc. Exchange after your contingencies (i.e. physical inspection, geological inspection, etc.) have been removed. If you have a very quick escrow, do not wait for the contingency period to be removed but notify our office immediately. Otherwise, after contingencies (except the loan contingency) are removed, you need to immediately furnish our office with a copy of your Escrow Instructions, 4 Admendments, Preliminary Report (Prelim), and Purchase Contract (if available) for our use in processing the transaction.
Q. What does Monarch Title Company, Inc. Exchange do after they receive the escrow instructions and prelim from escrow?
Upon our receipt of escrow’s package, we will then prepare our Exchange Agreement and Substitution of either Buyer or Seller for your use in the escrow. Our exchange file is then set up to coincide with how your escrow is structured (see notes below as to the percentage interests; Purchase Money Trust Deeds; etc.). We then forward the documentation to you and ask that you obtain the signatures of the Exchanger and your buyer or seller as applicable. Please return the documents to our office as soon as the signatures are obtained.
From the point in which the Substitution of Buyer or Seller has been prepared, Monarch Title Company, Inc. Exchange is then your Buyer or Seller. This means that any subsequent amendments, etc. that require the principal’s signature must show Monarch Title Company, Inc. Exchange Company in addition to the original parties. If Monarch Title Company, Inc. Exchange is not specified in the documents, you are jeopardizing the exchange transaction.
So remember, place Monarch Title Company, Inc. Exchange Company in place of the Exchanger, as the principal, and have the Exchanger merely “acknowledge receipt” of all subsequent instructions. This rule applies if you are canceling or superseding your escrow instructions.
Q. How do I handle the estimated closing statements?
Monarch Title Company, Inc. Exchange Company will show as either the Buyer or Seller. You will send us the Estimate for our approval with a copy of the Exchanger’s acknowledgment of same on the bottom. We cannot sign until this acknowledgement is received. Additionally we must receive the final closing statement immediately upon escrow closing showing our name as principal together with any other documentation requested in our instruction letter. We cannot complete our exchange file without these items.
Q. How do I handle the money received and/or disbursed from my escrow?
In the event your Buyer is the one doing an exchange, that means that Monarch Title Company, Inc. Exchange Company is already in receipt of exchange funds. You must contact our office to see if the initial deposit is coming from us as Intermediary or if the Exchanger/Buyer will be depositing it directly. Often the Buyer will need to come up with money in addition to the exchange proceeds to complete the purchase. If Monarch Title Company, Inc. Exchange gives you the initial deposit, you should show us on the receipt and your original Escrow Instructions. However, most of the time, you will be receiving an initial deposit directly from the Exchanger/Buyer and they will be shown as the Buyer until Monarch Title Company, Inc. Exchange has been substituted in as Buyer at a later date.
CAUTION: In this event, your closing statement will need to show a line item as “return of initial deposit to Exchanger” in order to clarify to IRS that the Exchanger did not have any constructive receipt of funds. Furthermore, any and all proceeds and/or refunds that you prepare in your escrow must be made payable to Monarch Title Company, Inc. Exchange Company, even if they are after the close of escrow or you will jeopardize the exchange. Remember that once Monarch Title Company, Inc. Exchange is substituted in as either buyer or seller, Monarch Title Company, Inc. Exchange is your principal. This is very important to remember so that you always keep our office informed.
Q. How do we handle the situation where the Seller is doing an Exchange and they will be carrying back a note and deed of trust in the escrow?
Again, this is a very crucial point to the exchange transaction so you must communicate clearly with the Exchanger/Seller, their tax advisor, and our office as to the proper structure of the transaction. If the PMTD is to be part of the Exchange, you will show Monarch Title Company, Inc. Exchange Company as your Beneficiary. Then, through our exchange file, we will handle the assignment of same to the Exchanger/Seller or to whomever it will eventually be assigned. Sometimes the PMTD will roll into the Exchanger’s “replacement property”. If the PMTD is not to be a part of the Exchange (typically because the Exchanger/Seller also intends to have installment sale treatment for the PMTD) then it is very important that your closing statement reflect the percentage interests and that you prepare an amendment in your escrow regarding same.
EXAMPLE: John Smith, an unmarried man, is your Seller. He is going to carry back a Note/Trust Deed for $100,000 and the purchase price of the property is $400,000. Mr. Smith does not want to have the Note/Trust Deed go through his exchange, as he will be effecting an installment sale for same, therefore your amendment should read: “Escrow Holder is hereby notified that the escrow closing statement being prepared through this escrow shall reflect the following percentage divisions: Monarch Title Company, Inc. Exchange Company, a California corporation, as to an undivided 75% interest; and, John Smith, an unmarried man, as to an undivided 25% interest”.