If you’re buying property from a seller who is doing a 1031 exchange, the practical effect on you is small: you sign a short set of extra documents, your purchase funds go to a neutral third party instead of the seller directly, and you cooperate with the paperwork the IRS requires. Your price, your contingencies, your closing costs, and your tax situation stay exactly as they would in any other purchase. The tax benefit — and the risk if anything goes wrong with the exchange — belongs entirely to the seller.
A 1031 exchange lets a seller defer capital gains tax by reinvesting the sale proceeds into a like-kind investment property under Section 1031 of the Internal Revenue Code, which applies only to real property held for business or investment use.1Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment You’re the counterparty on the first leg of that exchange, called the sale of the relinquished property. You are not doing an exchange yourself.
The Cooperation Clause You’ll See in the Contract
Your purchase agreement will include a cooperation clause, sometimes written as a separate 1031 exchange addendum, stating that the seller intends to complete a tax-deferred exchange and asking you to cooperate with reasonable steps to make it happen.
The clause typically commits to three things on the seller’s side: the exchange will not delay your closing, it will not create any additional expense for you, and the seller’s rights under the contract may be assigned to a qualified intermediary. Federal regulations require that every party to the purchase agreement receive written notice of that assignment on or before the property transfers, or the seller loses the tax-deferred status of the exchange.2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
Most cooperation clauses also include a hold-harmless or indemnification provision. The seller agrees to cover any costs or claims tied to the exchange and to protect you from liability if the exchange fails on their end.
The Extra Documents You’ll Sign
Once the qualified intermediary — the QI or accommodator — enters the transaction, you’ll receive a small set of exchange documents. The main one is the Assignment of Contract, which transfers the seller’s rights under the purchase agreement to the QI but not the seller’s obligations. The seller still owes you everything the contract promises, including warranties and the condition of the property at closing.
You’ll also sign a Notice of Assignment. That document is the formal evidence that you were notified before the property transferred, which is what the federal regulations require.2eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
Signing these forms does not change your purchase price, your inspection rights, your financing terms, or any other provision of your contract. They usually arrive from the QI shortly before or at closing, either through an electronic signature platform or at the table. Before you sign, check that your name and the property’s legal description match your title records exactly, or recording can be delayed.
Where Your Money Goes at Closing
On closing day, your purchase funds don’t go straight to the seller. Whether you’re paying cash or funding through a mortgage, the money is wired to an escrow account controlled by the QI, who holds the proceeds until the seller closes on the replacement property. The seller is not allowed to touch the cash at any point without blowing up the exchange.
The deed still transfers directly from the seller to you. This is called direct deeding, and it’s the standard approach under IRS Revenue Ruling 90-34. Your chain of title stays clean; there’s no gap where the QI holds title.
Tell your lender about the QI’s involvement early. Some lenders require specific language on the settlement statement reflecting the exchange, and a surprise about where the funds are going can delay funding. Once the QI confirms receipt of the funds and the deed is recorded in your name, your part of the exchange is done.
How the Seller’s Deadlines Can Affect Your Timeline
The seller works under two hard IRS deadlines that start ticking on the day you close. They have 45 calendar days to identify potential replacement properties and 180 calendar days to close on at least one of them.1Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment Miss either one, and the exchange fails and the full capital gains tax comes due.
That timing pressure shapes how the seller behaves. Delay costs them days off both clocks, so they’re often unwilling to grant closing extensions and highly motivated to hit the scheduled date. That can work in your favor. A seller under pressure may accept your offer faster, agree to reasonable repair requests, or make concessions to keep the closing on track. Expect them to push back hard, though, on anything that pushes the date.
Your Contract Rights Don’t Change
The cooperation clause adds paperwork obligations. It doesn’t waive any of your standard protections. Inspection contingencies, financing contingencies, title review, and your right to renegotiate or cancel if a contingency isn’t met all survive intact.
The price is still negotiable. Disclosure requirements still apply to the property’s condition. Your lender’s appraisal and underwriting standards still apply. If inspection turns up problems, you can exercise your contingency rights the same way you would in any other purchase.
Watch for FHA Loan Restrictions
If you’re financing with an FHA-insured mortgage, the seller’s 1031 exchange can create a real problem. Federal regulations require that FHA-eligible properties be purchased from the owner of record, and the transaction cannot involve any sale or assignment of the sales contract.3eCFR. 24 CFR 203.37a – Sale of Property Because a 1031 exchange assigns the seller’s contract rights to the QI, an FHA lender may flag the deal as a prohibited assignment.
How it plays out depends on the lender. Some distinguish a 1031 assignment, where the seller remains the owner of record and deeds directly to you, from a speculative contract flip. Others apply the restriction across the board. If you’re using FHA financing, raise the seller’s exchange with your loan officer before you get deep into the process. Conventional and portfolio loans generally don’t carry this restriction.
Costs, Fees, and What Happens If the Exchange Fails
You don’t pay any of the exchange costs. The QI’s fees, the exchange documentation, and any administrative expenses tied to the 1031 belong to the seller. Your financial commitment is the purchase price and the closing costs already set out in your contract, nothing more.
Signing the exchange documents doesn’t create a partnership or any legal relationship with the seller beyond the purchase agreement. If the seller later misses the 45-day or 180-day deadline, can’t find suitable replacement property, or gets challenged by the IRS, none of that reaches you. You own the property, the deed is recorded in your name, and the tax consequences fall on the seller alone. The hold-harmless language in the cooperation clause backs that up: if the seller’s exchange triggers an IRS dispute, they’ve agreed to indemnify you against any claims that flow from it.
If the Seller Is Doing a Reverse Exchange
You may occasionally encounter a reverse exchange, where the investor acquires the replacement property before selling the old one. Under IRS rules, an entity called an Exchange Accommodation Titleholder, or EAT, temporarily takes title to one of the properties under a qualified exchange accommodation arrangement.
If the property you’re buying is the relinquished side of a reverse exchange, the seller of record on your deed may be the EAT — usually a single-member LLC set up for the transaction — rather than the investor personally. The EAT has to transfer the property to you within 180 days of the parking arrangement’s start date, and all parties still need written notice of the assignment on or before the transfer.4Internal Revenue Service. Private Letter Ruling PLR-110110-24
From your side, most of the difference is behind the scenes. You negotiate the price, run inspections, and close through a title company as usual. Confirm with your closing agent that the EAT has authority to convey the property and that your title insurance covers a transfer from the EAT entity.
Your Taxes and Basis After Closing
The exchange creates no unusual tax reporting for you. The closing agent files Form 1099-S with the IRS to report the gross proceeds, and the form identifies the seller as the transferor, not you.5Internal Revenue Service. Instructions for Form 1099-S (04/2025)
Your tax basis in the property is what you paid for it, the same as in any other purchase. The seller’s deferred gain and exchange history don’t affect your basis, your depreciation schedule if you hold the property as an investment, or your taxes when you eventually sell.