When Would I Use Direct Deeding?
by Sandy Gadow
When you are exchanging property under a 1031 Tax Deferred Exchange, you may
choose to "direct deed" your property to the buyer or have the seller direct
deed his property to you. Direct deeding is achieved by deeding your property
directly to the buyer rather than to an intermediary, which initially was the
common practice in 1031 tax deferred exchanges. The seller of the property which
you are buying then deeds his property directly to you, skipping the deed to an
intermediary.
An IRS ruling in 1990 provided that it was no longer necessary to use
"sequential" deeding in a tax-deferred exchange transaction. Under sequential
deeding, a deed from the Seller was given to an intermediary who then deeded the
property to the buyer. Most property transfers in tax-deferred exchanges today
use "direct deeding" rather than "sequential deeding."
Using direct deeding reduces the risks involved to an intermediary, who would be
in title for a short period of time and exposed to risks of liability for
asbestos or other environmental hazards and the disclosures required for those
risks. Direct deeding also eliminates the payment of duplicate transfer taxes
which are normally charged each time a deed is recorded.
There are several safeguards you can use when direct deeding. Be sure that if
you are using a qualified intermediary, that your intermediary has an agreement
with your buyer for the transfer of the property to be exchanged. Also be sure
that your intermediary has an agreement with the seller of the property you will
be acquiring which allows for the transfer of that replacement property to you.
All parties to the agreement must be notified in writing of your intention to
use an intermediary in the exchange. If you are using a qualified intermediary
in your exchange, typically the intermediary will have an affiliation with a
title or escrow company, which can then provide all the services required to
handle the closing, such as title insurance, escrow services, and document
preparation and transfers. There are several advantages to using a professional
intermediary in your exchange.
These advantages include reducing the potential liability for the structure of
the exchange and any tax consequences, shielding the principals from accepting
additional liability, and providing an audible trail by way of the assignments
and exchange agreements.
When choosing a tax deferred exchange, be sure to be aware of the tax
regulations required to qualify the exchange under IRS tax regulations. These
regulations will spell out how to identify your replacement property and how
many properties you can identity, how you can structure the exchange, how to
direct deed your relinquished property to your buyer, how you can receive
remaining cash that you may not choose to invest in the replacement property,
how to receive interest on your exchange balance in addition to how to handle
the closing and other transaction costs.
Bio:
Sandra Gadow is a title officer with more than 25 years experience in escrow,
title, and real estate. She has helped thousands of people buy their homes.
She is a mortgage broker, and a member of the American Land Title Association,
the California Escrow Association, the National Association of Real Estate
Editors, and the California Association of Realtors.