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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
An attorney can help you structure a 1031 exchange, review contracts, and understand the legal duties you take on. The work is most useful when it starts before the sale closes, with clear roles for your lawyer, CPA, qualified intermediary, and investment professional. This guide explains what to ask your attorney to review and how to keep important details from falling between the cracks.
A 1031 exchange joins a property sale to a replacement purchase under federal tax rules. Both transactions also have contracts, ownership documents, and closing requirements. A problem in one area can affect the whole plan.
Your attorney should have time to review the structure before a deadline makes your choices smaller. Once sale proceeds reach you, a lawyer cannot simply rename the sale an exchange. Federal rules distinguish an exchange from a sale followed by a purchase, even when both transactions happen within the usual time limits. [1]
I would treat legal review as part of planning the exchange, not as a final stamp on paperwork. That does not mean every exchange needs a long written legal opinion. It means deciding who will answer the legal questions before you must act on the answers.
Start by sending your lawyer the purchase agreement, current deed, ownership documents, loan statement, and expected closing date. Explain what you want to own afterward and whether anyone else shares ownership today. Those facts help define the assignment.
A lawyer hired to review your sale contract may have a narrow job. The work may not cover your tax plan, a private investment, or your will and trust. Ask what work the fee covers. Get the answer in writing, including what is left out.
The American Bar Association's Model Rule 1.2 allows a reasonable limit on representation when the client gives informed consent. Model rules are not a substitute for the professional rules adopted in your state. The point is simple: know what your lawyer agreed to do. Do not assume the job covers every part of the exchange. [2]
Here is a useful way to divide the questions. This is a planning outline, not a legal rule assigning duties to every professional.
| Work area | Ask who is responsible | Useful written result |
|---|---|---|
| Exchange structure and contracts | Your attorney, with tax counsel if needed | Issues to resolve before signing or closing |
| Tax basis, gain, and reporting | Your CPA and any tax lawyer engaged | Tax estimate, assumptions, and filing plan |
| Exchange documents and funds | Your qualified intermediary | Executed agreement and confirmed procedures |
| Replacement investment review | Your investment professional and relevant specialists | Terms, risks, costs, and fit with your needs |
| Title, escrow, and closing | Your closing team and attorney within their roles | Cleared conditions and final closing records |
One person can coordinate the file without doing everyone else's work. Ask who will resolve a disagreement, who needs to approve a change, and who will be reachable during closing week.
This sounds obvious until several owners sit around the same table. Is the client you, your spouse, a trust, an LLC, or a partnership? A lawyer hired by an LLC may work for the LLC. That does not mean each member has a lawyer for their own needs.
Ask directly about conflicts and shared representation. ABA Model Rule 1.7 addresses current-client conflicts, including directly adverse interests and significant limits on the lawyer's work. Some conflicts may be handled only if specified conditions are met, including informed written consent; others cannot. The applicable state rules and facts control. [3]
Suppose three siblings own an investment through an LLC. Two want another property, while the third wants cash. They may agree on the sale price but disagree about the next step. That is a reason to clarify representation early, not to assume one engagement protects every owner's separate interests.
Ask the same question when you review a private offering. A sponsor's lawyer prepares documents for that client. The existence of sponsor counsel is not the same as having a lawyer review the investment on your behalf.
Ask your lawyer and CPA to check who owns the property for tax purposes. Then compare that answer with the deed. They are related questions, but the name printed on a deed does not answer both.
For example, a single-member LLC generally is disregarded as separate from its owner for federal income-tax purposes unless it elects corporate treatment. An LLC with multiple members generally has a different default classification. An LLC can exist under state law even when it is ignored for income tax. Some payroll and excise-tax rules also treat it as separate. [4]
I would avoid a last-minute change of owner just to make a form look simpler. Ask your advisers to trace the current owner, tax classification, signing authority, and intended replacement owner. Then confirm the proposed documents follow that plan.
The review might include a trust certification, operating agreement, corporate resolution, or power of attorney. Which documents matter depends on the owner and transaction. A name on a signature line does not prove that person has the right to sign.
For partnership owners, separating the real estate from the entity shortly before a sale creates questions that a form letter cannot settle. Ask for transaction-specific analysis of ownership, investment intent, timing, and the planned cash flows. Do not assume a fixed number of days makes a restructuring safe.
A sale agreement may need cooperation, assignment, notice, or other provisions to support the exchange. Your lawyer can review the actual contract rather than rely on a sentence copied from a different deal.
Under the qualified-intermediary rules, assigning contract rights and giving the required written notice can let the intermediary be treated as acquiring and transferring property. This can occur without the intermediary taking record title. The required steps must be completed by the relevant transfer; an assignment alone does not excuse the other conditions. [1]
Ask what the buyer must do and what costs the buyer is being asked to accept. Also ask what happens if the buyer refuses an amendment. An exchange clause does not give you unlimited power to delay closing or rewrite the bargain.
Your lawyer can help distinguish negotiable business terms from tax requirements. A seller may agree to a longer inspection period. The government does not automatically extend the exchange period because a contract negotiation took longer than expected.
Keep the latest signed version in one shared closing file. Drafts with similar names can create confusion about deadlines, deposits, assignment rights, and who has approved which change.
A qualified intermediary, or QI, works under an exchange agreement that must meet the safe-harbor conditions. Among those conditions are limits on your right to receive, borrow, pledge, or otherwise benefit from the exchange money. Simply placing proceeds in a lawyer's trust account does not establish a qualifying arrangement. [1]
Your own attorney may also be disqualified from serving as QI. The regulation generally treats certain professionals who acted for you within the two years ending on the first relinquished-property transfer as your agents. It has specific exceptions, including services relating to intended Section 1031 exchanges. It also includes relationship rules. Have the facts checked. Do not assume every lawyer can serve, or that none can. [1]
Ask your lawyer to review the proposed QI agreement's fund restrictions, release conditions, liability provisions, dispute process, and bank arrangements within the engagement. The goal is to understand the contract you are signing.
Be cautious about assuming that hiring a QI automatically provides legal advice. Confirm which questions the QI will answer and which must go to independent counsel. Good coordination begins with everyone being clear about those limits.
In a standard deferred exchange, replacement property generally must be identified within 45 days after the first relinquished-property transfer. It must be received by the earlier of 180 days after that transfer or the tax-return due date, including extensions. The periods overlap. [1]
The regulation states midnight deadlines, but the people needed to finish a transaction do not all work until midnight. Your QI, lender, title company, sponsor, or bank may have earlier processing cutoffs. Plan around those working hours without confusing them with the federal rule.
Your lawyer can review whether the identification names the correct property or interest and follows the relevant method. The document generally must be signed and timely sent to a permitted recipient. Sending a list only to yourself or to a disqualified agent can create a problem. [1]
Ask the team to identify which multiple-property rule the list uses. Do not assume that one sponsor's portfolio is automatically one property for identification purposes. The legal interests and underlying facts need to be checked.
Add earlier dates to the calendar, too. When does counsel need the file? When must funds be ready? When will the team switch to a backup? Those dates are practical safeguards, not extra legal grace periods.
The replacement agreement deserves its own review. Tax deferral does not answer the contract questions. Can you get your deposit back? What if a condition fails? Which debts or other duties are you taking on?
For a direct property purchase, I would ask for a short list of unresolved items. These might include title exceptions, access rights, leases, tenant deposits, required repairs, lender conditions, or zoning questions. For each issue, name the document and the concern. Add who must resolve it and when you need an answer.
Environmental work is another example of why legal and technical reviews need to connect. EPA explains that certain federal cleanup-liability protections depend in part on pre-acquisition inquiries and continuing obligations. A report is not a promise that a property is clean or that every protection applies. An environmental professional performs the technical work; counsel helps assess the legal implications. [5]
For a hypothetical purchase, suppose a contract requires a $50,000 deposit that becomes nonrefundable after inspection. The projected tax deferral does not tell you whether to accept that risk. You still need to know which inspections are complete, what remains open, and what cancellation rights the actual agreement provides.
A Delaware statutory trust investment involves a different document set from buying a building yourself. Your attorney can review the offering materials and agreements that define your interest, subject to the agreed scope and relevant experience.
Revenue Ruling 2004-86 explains how the particular investment trust described there could qualify for Section 1031 treatment. The conclusion rests on its structure and limits. It is not blanket approval of every investment called a DST. [6]
Ask counsel to explain which rights you have, which powers the trustee has, and what happens if the planned business strategy cannot continue. Review transfer restrictions, any required consents, dispute provisions, and the circumstances for changing the ownership structure.
The tax analysis and investment judgment remain separate. A structure may support an exchange while exposing you to vacancies, debt pressure, expenses, illiquidity, or a loss of principal.
The SEC warns that private placements can involve limited disclosure and serious resale limits. A private placement memorandum, when provided, is not ordinarily reviewed by a regulator. A Form D filing does not mean the SEC approved the investment. Legal review should help you understand these limits, not turn them into a guarantee. [7]
If an offering includes a possible later move into a partnership, ask who controls that decision and how it could affect future exchange choices. Do not stop at the phrase “optional exit.” Find the provision that says whose option it is.
Buying from a relative or another business you control calls for special attention. Related-party rules can apply to direct and indirect exchanges, including transactions routed through a QI. Using an intermediary does not erase the relationship. [8]
Send your attorney an ownership chart that shows the people and entities on both sides. Include relationships that might seem unrelated to the property sale, such as a trust beneficiary or ownership in the seller's company.
Ask whether the proposed exchange qualifies at the outset and whether later transactions could affect it. Do not reduce the review to “hold it for two years.” The IRS instructions discuss anti-avoidance rules, reporting, and exceptions that require more careful analysis. [8]
Tell your advisers about planned gifts, transfers, or cash payments, too. They need to see the full plan, not just the first step.
Before closing, ask the team to compare the final documents with the approved plan. Check the buyer and seller names, property descriptions, money movements, loan amounts, and signing authority. Confirm who will send the final instructions.
Keep a simple record of changes. Write down each major change and why it was made. Note who approved it and which signed version is final. That is especially useful when a lender or seller sends revisions shortly before signing.
Protect the wire instructions separately. The FBI recommends verifying changes through another channel. If you suspect a fraudulent transfer, contact the financial institution immediately and report it to IC3; recovery is not guaranteed. Use a trusted contact number established independently of the suspicious message. [9]
I would also agree on a stop point: which unresolved issue requires a call before anyone signs or sends money? A title question, unexpected personal guarantee, or mismatch in ownership should not be brushed aside because the moving truck is booked.
Closing is not the end of the paperwork. Ask for the signed contracts, exchange agreement, assignment notices, identification records, settlement statements, ownership evidence, and important approvals. Keep final versions separate from working drafts.
Your CPA needs the records to calculate and report the exchange. Form 8824 addresses items such as liabilities, other property received, exchange expenses, deferred gain, and replacement basis. A purchase receipt alone does not supply the full tax history. [8]
Have counsel explain any duties that continue after closing. Depending on the documents, there may be notices, consents, transfer limits, or unresolved claims to track. Ask if the fee includes follow-up work. If it does not, agree on the next task and cost.
Finally, tell your estate-planning lawyer what you now own. The registration, governing documents, and transfer process may differ from the property you sold. It is easier to organize those details while the closing file is fresh.
You can ask for a phased review if that fits the work. First, have the lawyer check the planned structure and sale contract. Next, review the short list of replacement choices. Save the final check for the exact documents you will sign. Agree on each phase with counsel; do not assume a quick first look covers the later work.
Give the lawyer a clean file and a short list of questions. Mark which documents are drafts and which are signed. If a sponsor sends a new version, explain what changed and ask whether the change affects earlier advice.
For example, a buyer might start with a property held in their own name, then ask to add a business partner to the replacement purchase. That new fact may change the scope of the legal and tax review. It is more than a spelling correction on a form. Tell the team before anyone updates the closing instructions.
When the review is done, ask for the open issues in plain language. Which ones can be resolved? Which risks would remain if you close? What would cause the lawyer to ask for more time or more facts? Those answers help you make a choice without mistaking silence for approval.
You do not need every answer on the first call. You do need a plan to get them in time. A short written task list can be more useful than several people saying they are “keeping an eye on it.”
The federal deferred-exchange safe harbor does not impose a general requirement that every exchanger hire an attorney. State closing rules, the property, and the structure may create separate needs. Ask what legal work your transaction requires and who is authorized to perform it. [1]
Do not assume an ordinary trust account works. The exchange safe harbors have fund-control and disqualified-person rules. Your lawyer's recent work for you can matter, subject to specific exceptions. Have the arrangement reviewed before the sale money moves. [1]
You should not assume that. Ask who the lawyer's client is and whether you have a separate engagement. The QI's documents may explain its own role, but independent advice requires clarity about representation and scope. [2]
Receiving the full consideration can make the transaction a sale rather than a deferred exchange. Later buying a property within 180 days does not by itself repair that result. Contact your tax and legal advisers promptly, but do not count on relabeling the paperwork. [1]
Discuss a review with counsel experienced in the relevant tax and securities issues. The assignment can cover ownership rights, restrictions, obligations, and the structure's assumptions. It does not guarantee the investment's performance or replace the separate review of its business plan. [6] [7]
Have your attorney and CPA review it first. An LLC's tax classification, its owner, and the transaction documents all matter. A disregarded LLC may be treated differently from a partnership or corporation, but that does not make every proposed transfer harmless. [4]
A two-year hold is not a universal cure. Related-party anti-avoidance rules can affect the original structure, including an indirect purchase through a QI. Counsel needs to review the parties, money, tax basis, and full plan. [8]
Send a concise description of the plan, the signed sale agreement if one exists, the current deed and ownership documents, and the expected closing date. Add your questions and any planned ownership changes. Ask the lawyer what else is needed before giving advice.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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