Do You Need to Disclose a 1031 Exchange? What Every Investor Should Know
When completing a 1031 Exchange, timing and compliance are everything — but what about disclosure?
Do you need to tell the buyer or seller that you’re doing a 1031 Exchange? And if so, when and how?
Understanding when disclosure is required (and why it matters) can help ensure your exchange remains valid under IRS rules and runs smoothly through closing.
Why Disclosure Matters in a 1031 Exchange
The IRS doesn’t require you to publicly announce your intent to complete a 1031 Exchange. However, certain parties must be informed to properly structure the transaction.
Because a 1031 Exchange involves specific legal and procedural steps — including the use of a Qualified Intermediary (QI) and strict timelines — disclosure helps ensure that all parties handle funds and documents in a compliant way.
Failing to disclose to the right people at the right time could jeopardize your exchange qualification.
Who Needs to Be Notified — and When
1. The Buyer of Your Relinquished Property
While you don’t need to share tax details, it’s standard practice to notify the buyer in writing that the sale is part of a 1031 Exchange.
This disclosure ensures the buyer understands that a Qualified Intermediary will step into your place to receive sale proceeds — a required step to prevent constructive receipt of funds.
Most often, this notice appears as a simple clause in the purchase agreement or as an addendum provided before closing.
2. The Seller of Your Replacement Property
Similarly, the seller of the replacement property should also be informed that the purchase is being made as part of a 1031 Exchange.
This ensures they coordinate with your QI during closing so that funds are transferred properly.
3. Your Qualified Intermediary (QI)
Your QI should be informed before the sale of your relinquished property. Once the contract is signed, the QI prepares the necessary documentation, including exchange agreements, assignment notices, and replacement property identification forms.
The QI will also communicate directly with your title and escrow company to make sure the funds are never under your direct control — which is critical for maintaining exchange eligibility.
4. Your Escrow or Title Company
Your title or escrow company must also be aware that the transaction is a 1031 Exchange. This ensures that all settlement statements and disbursements are properly titled and coordinated with your QI.
How to Disclose a 1031 Exchange
Disclosure can be as simple as adding a short clause to the purchase agreement. A typical example reads:
“Buyer is aware that Seller intends to perform a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Seller requests Buyer’s cooperation in such exchange, at no additional cost or liability to Buyer.”
This language protects both parties and confirms that the exchange will not affect the buyer’s or seller’s financial obligations.
When Disclosure Isn’t Required
You do not need to disclose your 1031 Exchange to:
The IRS before filing your tax return (you’ll report it later using Form 8824)
Lenders, unless the loan terms require it
The general public or unrelated third parties
Disclosure is strictly about ensuring compliance between parties directly involved in the transaction — not about announcing your tax strategy.
Disclosure Done Right Protects Your Tax Deferral
A successful 1031 Exchange depends on precision, communication, and proper documentation.
While the IRS doesn’t require broad disclosure, notifying the buyer, seller, QI, and escrow company is essential to protect your exchange’s validity.
By handling disclosure early and clearly, you avoid closing delays, documentation errors, and compliance risks — ensuring your exchange proceeds as the IRS intends: smoothly and tax-deferred.
Disclaimer
This article is for informational purposes only and does not constitute legal, tax, or investment advice. Investors should consult with a Qualified Intermediary, tax professional, or attorney familiar with IRS Section 1031 regulations before proceeding with an exchange or drafting disclosure language for contracts.
