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Direct Deed

In a 1031 exchange, a Direct Deed is a legal instrument used in the process of a tax-deferred exchange under Section 1031 of the U.S. Internal Revenue Code. The term refers to the method of transferring real property directly from the seller (also known as the exchanger) to the buyer without the property first passing through an intermediary or an accommodator.

When a property owner engages in a 1031 exchange, they are seeking to defer capital gains taxes that would normally be due upon the sale of a property by using the proceeds to purchase a like-kind property. The IRS requires that the transaction be structured in a way that the seller does not take constructive receipt of the funds during the exchange process. This is where the Direct Deed comes into play.

In a typical 1031 exchange, an intermediary, known as a Qualified Intermediary (QI), is used to facilitate the transaction. The QI holds the proceeds from the sale of the relinquished property and uses them to acquire the replacement property, which is then deeded directly to the exchanger. The Direct Deed method bypasses the need for the property to be deeded to the QI. Instead, the deed is transferred directly from the seller to the buyer, with the exchange agreement stipulating that the seller has assigned their rights to the QI for the purposes of the exchange. This ensures that the exchange complies with IRS rules and that the seller does not have access to the funds, thereby allowing the tax deferral to remain intact.