<p>Two terms common to the sale and purchase of real estate are “earnest money” and “down payment.” In this blog post, I will review the definitions of each of these terms and how they are used in the context of real estate and escrow. &nbsp;</p>

<h2>What is Earnest Money?</h2>

<p>According to Merriam-Webster, earnest money has various definitions, including:</p>

<blockquote>
<ul>
<li>a serious and intent mental state</li>
<li>something of value given by a buyer to a seller to bind a bargain</li>
<li>a token of what is to come</li>
</ul>
</blockquote>

<p>Earnest money is exactly these things.&nbsp; In the purchase of an asset, it represents an advance deposit made by the purchaser toward the final purchase price.&nbsp; Earnest money establishes the purchaser’s intent to acquire, through the contribution of value as a “token of what is to come.”&nbsp; These dollars are frequently held by a third-party escrow agent, in trust, until conditions for release have been met.</p>

<p>Conditions for release of these funds are negotiated between the seller and purchaser, and the earnest money can be applied against the purchase price of the asset after certain conditions are met, such as:</p>

<ul>
<li>Completion of inspection(s) or testing</li>
<li>Completions of due diligence</li>
<li>Purchaser’s procurement of additional financing</li>
</ul>

<p>The terms of the purchase or sale contract will determine whether the earnest money is refunded to the purchaser or retained by the seller.&nbsp; Ultimately, earnest money can effectively be used to protect both parties.&nbsp; If the purchaser is unable to fulfill certain contracted obligations, then the seller may retain the funds and avoid the burden of a settlement through the court system.&nbsp; On the flip side, the purchaser is protected and can get funds back if the seller terminates the agreement or if inspections or due diligence produce a failing event.</p>

<h2>What is a Down Payment?</h2>

<p>Back to Merriam-Webster for the definition of a down payment:</p>

<blockquote>
<p>a part of the full price paid at the time of purchase or delivery with the balance to be paid later</p>
</blockquote>

<p>A down payment differs from earnest money in that, in the case of a down payment, the purchaser and the seller have moved successfully through contracted requirements and have arrived at a lender requirement for the purchaser to place a certain amount of their own money toward the acquisition price of the asset.<br />
&nbsp;<br />
Down payments can vary in amount, depending upon lender requirements and how much the purchaser can reasonably afford.&nbsp; As a general rule, the more the purchaser can apply as a down payment, the better, as the larger amount can make:</p>

<ul>
<li>the loan approval process easier,</li>
<li>the amount of the loan smaller, and</li>
<li>the resulting payments and interest costs lower.</li>
</ul>

<h2>Summary</h2>

<p>While different, earnest money and down payments are a very important part of the sale and purchase process.&nbsp; As stated above, the more a purchaser can apply as earnest money or as a down payment, the better.&nbsp; Large earnest money deposits can encourage the seller toward temporarily taking the asset off the market and accepting the purchaser’s offer.&nbsp; In highly competitive scenarios, earnest money is a powerful tool for the purchaser.&nbsp; Down payments represent another powerful tool for the purchaser, as they indicate a strong commitment to the lender regarding shared risk in the investment.&nbsp;</p>

<p>In a sale of real estate, it’s common for the seller, the taxpayer in a <a href="/services/1031-exchange">1031 exchange</a>, to receive money down from the buyer in the sale and to carry a note for the additional sum due. The taxpayer facilitates financing for the buyer in this way to make the transaction happen. Sometimes this arrangement is entered into because both parties wish to close, but the buyer’s conventional financing is taking more time than expected. If the buyer can procure the financing from the institutional lender before the taxpayer closes on their replacement property, the note may simply be substituted for cash from the buyer’s loan. Regardless of the circumstance for seller financing, without further steps, the taxpayer’s use of the value of the note toward the purchase of the replacement property will be taxable.</p>

<p>In a non-exchange context there is no problem in the taxpayer carrying back a note from the buyer. However, under the exchange regulations, the actual or constructive receipt of the note would run afoul of <a href="https://www.accruit.com/blog/understanding-like-kind-requirement-1031-e…; title="1031 like-kind exchange">1031 like-kind exchange</a> rules. More specifically, as stated in the regulations:</p>

<blockquote>
<p>“If the taxpayer actually or constructively receives money or other property in…. consideration for the relinquished property before the taxpayer actually receives like-kind replacement property, the transaction will constitute a sale and not a deferred exchange, even though the taxpayer may ultimately receive like-kind replacement property.”</p>
</blockquote>

<p>The taxpayer’s receipt of the note would constitute “other property,” and the amount of the note would constitute “boot” and would be taxable. However, there are <u>two ways</u> to work around this adverse consequence, both of which require the note (and instrument securing the note) to be <a href="/blog/safe-harbors-core-section-1031-treasury-regulations">issued in the name of the qualified intermediary f/b/o taxpayer’s name</a>.</p>

<h2>Relinquished Property Buyer’s Note is Used to Purchase Replacement Property</h2>

<p>Once issued in the qualified intermediary’s name, the trick then is to use the note or its value to purchase, in whole or in part, the replacement property. Under certain limited circumstances, the seller of the replacement property may be willing to take the note as part of the payment for the replacement property. Typically, the instrument securing the note would also be transferred to the replacement property’s seller. Although not legally required, the taxpayer would typically be expected to add his guaranty to the note to further enhance the third party seller’s degree of security. The third party seller’s receipt of the note would also allow that party to report the gain on the sale on an installment basis which is beneficial assuming that this party is not also doing his or her own exchange. However, in the real world, it is a bit difficult to expect the seller to agree to accept the note as part of the purchase price.</p>

<h2>Note Buyout by Taxpayer Prior to Replacement Property Purchase</h2>

<p>A solution is for the taxpayer to “buy” or redeem his own note from his exchange account with fresh cash. These funds can be cash that the taxpayer already has available, such as from a home equity line, or it can be from a loan that the taxpayer takes out to buy the note. Essentially, this enables the taxpayer to advance those personal funds into the replacement property even though not receiving the equivalent amount of cash from the buyer at that time. The benefit to the note buyout is that the future principal payments (but not interest) received by the taxpayer over time will be fully tax-deferred.</p>

<p>In the example above, care should be taken during the negotiations with the buyer of the relinquished property to assure that the taxpayer will be receiving sufficient interest on the buyer’s note to offset the costs of any loan taken out by the taxpayer or the time value of the taxpayer’s personal funds used to acquire the note from the <a href="https://www.accruit.com/qi-services&quot; title="qualified intermediary">qualified intermediary</a>.</p>

<p>The taxpayer and qualified intermediary should also be careful in timing when the note is assigned to the taxpayer. There is a natural tendency to pass the note simultaneously upon receipt by the qualified intermediary of the equivalent amount of cash. After all, the client is putting into the exchange account the exact same value that is being taken out. However, because the regulations prohibit the taxpayer from the “right to receive money or other property” during the pendency of the exchange transaction, it is probably a safer practice to to assign the note to the seller simultaneously with the acquisition of the replacement property or after the replacement property has been acquired. Some qualified intermediaries will provide a form they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.</p>

<p>For more information about 1031 exchanges, contact Accruit by calling&nbsp;<a href="tel:8002371031" tabindex="-1">(800) 237-1031</a>&nbsp;or emailing <a href="mailto: info@accruit.com" title="info@accruit.com">info@accruit.com</a> today!&nbsp;</p>

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<p>The Tax Cuts and Jobs Act of 2017 (TCJA) that took effect on January 1, 2018 was a major overhaul of the Internal Revenue Code. Late in 2017, while changes to Section 1031 were being contemplated by Congress, Accruit posted <a href="https://www.accruit.com/blog/what-are-effects-tax-reform-1031-tax-defer… blog article concerning some of the proposed amendments or even total repeal of Section 1031</a> being contemplated in Washington, D.C. and the potential adverse effects on tax deferred exchanges.</p>

<p>Fortunately, the TCJA passed by Congress and signed into law by the President generally preserved like-kind exchanges under Section 1031 of the Code. Although Section 1031 has been around for nearly one hundred years, the TCJA now limits the non-recognition treatment to only like-kind exchanges of real estate. While 1031 exchanges relating to real property remain unchanged, the TCJA completely eliminates the ability of a taxpayer to defer the gain on all types of personal property assets after January 1, 2018, such as:</p>

<ul>
<li>Aircraft</li>
<li>Railcars</li>
<li>Franchise and dealership rights</li>
<li>Art and other collectibles</li>
<li>Equipment and machinery</li>
<li>Off-lease assets</li>
<li>Patents and other intellectual property</li>
<li>Vehicles, trucks and trailers</li>
</ul>

<p><br />
As a result of personal property now being excluded from Section 1031 exchanges under the Code, the taxpayer could realize a sizable gain in exchanges of real property that include a significant amount of personal property. For example, transactions involving multi-unit apartment buildings, hotels and restaurants may include substantial personal property to be conveyed in addition to the real estate.</p>

<p>Although the real property may qualify for a 1031 like-kind exchange, the personal property transferred with the real estate cannot be simply disregarded under the TCJA. The taxpayer will need to allocate the portions of purchase price attributable to the real estate and personal property. Unfortunately, the personal property included would likely be considered taxable “boot” in the real property exchange. In such instances the taxpayer should consider the TCJA bonus depreciation and immediate expensing provisions. The accelerated depreciation rules can take much of the sting out to the inability to do an exchange for personal property</p>

<p>Interestingly, the changes implemented by the TCJA also materially affect the world of professional sports. Pro sports teams that trade players are seen as effectively trading those players’ contracts which are regarded as assets for tax purposes. Consequently, it is possible that sports franchises may seek to trade fewer players now that they can no longer use Section 1031 for like-kind exchanges to make player trades on a tax-deferred basis and have to pay taxes each time they make a trade.</p>

<p>Congress enacted significant changes to the like-kind exchange rules under Section 1031 by way of the TCJA. The removal of personal property from like-kind exchanges has adversely affected many taxpayers and greatly impacted other industries. There are no guarantees that will not revisit the notion of repealing Section 1031 exchanges altogether. It is more important than ever before to consult with your legal and tax professionals, as well as the professionals at Accruit, as soon as possible concerning the new law and its impact on your next like-kind exchange of real estate.</p>

<p>The descriptions of these entities are organized according to their functional characteristics, such as formation, management and conduct of business, firm property, ownership interests, dissociation of owners, and dissolution of the firm. This allows the reader to compare and contrast the alternatives offered by the various forms.</p>

<h2>Tax Law and Business Law Considerations of Real Estate Entities</h2>

<p>Investors can choose from several different organizational forms for purposes of purchasing real estate. Most organizational entities are separate and apart from the assets and liabilities of any other entity or owner. The choice of entities in owning real estate is usually dependent upon a combination of business law and tax factors.</p>

<p>Tax law considerations include:</p>

<ul>
<li>Federal and state income tax treatment and consequences</li>
</ul>

<ul>
<li>The nature of the property to be owned by the investors</li>
</ul>

<ul>
<li>Distributions of cash and appreciated property</li>
</ul>

<ul>
<li>Organization, re-organization, sale, and the ability to do business in another state</li>
</ul>

<p>Business law considerations include:</p>

<ul>
<li>The number of individual investors</li>
</ul>

<ul>
<li>An investor’s anticipated involvement in the operation and management of the real estate</li>
</ul>

<ul>
<li>The risk involved in the investment</li>
</ul>

<ul>
<li>Personal liability</li>
</ul>

<ul>
<li>Allocations of management authority within the entity</li>
</ul>

<ul>
<li>Qualifications of owners</li>
</ul>

<ul>
<li>Sharing of profits and losses</li>
</ul>

<ul>
<li>Duration of the entity, transferability of interests, exit strategies, and liquidation</li>
</ul>

<h2>Common Organizational Structures for Owning Real Estate</h2>

<p>Several different ownership structures exist for purposes of owning real estate. Some of the more common forms include:</p>

<ul>
<li>Individual/Sole Proprietorship</li>
</ul>

<ul>
<li>Tenancy in Common</li>
</ul>

<ul>
<li>Land Trust</li>
</ul>

<ul>
<li>General Partnership</li>
</ul>

<ul>
<li>Limited Partnership</li>
</ul>

<ul>
<li>Corporation (C-corp &amp; S-corp)</li>
</ul>

<ul>
<li>Limited Liability Company (LLC)</li>
</ul>

<p>Many investors choose a limited liability company as their organizational form to purchase real estate because of its tax treatment, flexibility in power structure and management responsibilities, and limited liability. The best way to understand the unique features of an LLC is to distinguish it from the other entities.</p>

<p>We will begin our discussion with the most basic of all forms: a sole proprietorship.</p>

<h2>Sole Proprietorships</h2>

<p>A sole proprietorship is owned by a single person and exists absent a statutory scheme. It has no separate legal existence from its owner. In other words, no legal formalities are required to bring this form into existence. There are no organizational or operational costs, and no qualification requirements exist for doing business in other states.</p>

<p>The sole proprietor may hire employees or independent contractors; however, all the decision-making is centered with the individual owner. The owner is not insulated from liability and directly assigned all profits and losses. Also, the sole owner does not need to file a separate tax return. Only minimal reporting to is required through Form 1040 and Schedule C. The income or loss of Schedule C is added or subtracted to the 1040 to determine tax liability. Business profits are subject to only one tax at the individual level.</p>

<h2>Tenants in Common</h2>

<p>Another way to hold an interest in real estate is as tenants in common. Tenancy in common (TIC) is the ownership of real estate by more than one person, with each owner retaining an undivided interest in the property. Like the sole proprietorship, no entity is formed to own that interest. An investor can own the interest as he wants on his tax return.</p>

<p>Tenancy in common also allows for continuous ownership upon death or bankruptcy of any other owner. The owner may sell his interest, initiate a sale and partition suit (which is essentially a forced sale which generally occurs because the owners of property are unable to agree upon certain aspects of the ownership), or dissolve the tenancy in common. The TIC interest goes to the heirs of that owner rather than to the other tenants in common. The agreements between tenants in common usually deal with the sharing of expenses and provide one owner with the right to buy out the other owner when used.</p>

<h2>Summary</h2>

<p>In the first of this series on selecting a real estate entity, we looked at the sole proprietorship and tenant in common entities, each of which have distinct characteristics that could influence why one may or may not choose to select them. <a href="/blog/selecting-entity-real-estate-purchase-%E2%80%93-partnerships">In our next installment on entities for real estate purchase, we discuss partnerships</a>.</p>

<p>1031 tax-deferred exchanges were established as part of United States tax law in 1921, yet there are still misconceptions about like-kind exchanges and how they work. Let's clear up a few in this post.</p>

<h2>I can receive tax deferral by rolling over my gain into new property</h2>

<p>No, this is not the case. In order to receive full deferral, the value of the property must be replaced, net of the closing costs. In other words, the net proceeds from the sale of the relinquished property must be rolled over and new debt must be on the new property in an amount equal or greater than the amount of debt paid off in the sale of the relinquished property. The first dollars not rolled over will be considered return of the gain, not return of the capital investment nor prorated between the gain and capital investment.</p>

<h2>If I trade up or even in value, I am deferring all my gain.</h2>

<p>Yes and no. More specifically, a taxpayer has to use up all the net cash and have equal or greater debt than was paid off upon sale of the relinquished property. And while excess cash can be added to replacement property to replace debt retired, the corollary is not true; excess debt on replacement property will not offset cash received upon the sale of the relinquished property.</p>

<h2>If I or my attorney holds the buyer’s earnest money, my exchange will fail due to the receipt of funds.</h2>

<p>While it is true that actual receipt, in which you hold the buyer’s earnest money, or constructive receipt, in which your attorney or agent holds the buyer’s earnest money, will violate the rule that a taxpayer can have no right to “receive, pledge or otherwise obtain the benefits of money,” technically these rules do not come into being until the time of the exchange event, i.e. the sale of the relinquished property. As such, holding the funds prior to that time is not a problem so long as the funds are turned over to the qualified intermediary directly or through the settlement agent at the time of closing.</p>

<h2>If I elect to terminate the exchange and pay full taxes owed, I can receive my exchange funds at any time.</h2>

<p>The exchange regulations appear to be contrary to this common sense position. The regulations allow return of funds only upon the failure to identify replacement property within 45 days of the sale of relinquished property or upon taxpayer’s receipt of all identified property which the taxpayer is entitled to acquire or upon the expiration of the 180 day exchange period. In the year 2000, the IRS issued a Private Letter Ruling underscoring <a aria-label="Early Release of Funds in 1031 Exchange" href="/blog/early-release-exchange-funds-possible-under-1031-exchange-rules" title="Early Release of Funds in 1031 Exchange">these rules</a>. Even if a taxpayer is not concerned about a violation of these rules in the event of a failed exchange, the qualified intermediary abides by the rules in order to establish a course of conduct consistent with the rules.</p>

<h2>I cannot effectuate an exchange if my contract fails to contain an Exchange Cooperation Clause.</h2>

<p>Not so. Early in the history of exchanges, a buyer had to actively participate in the exchange in order for the taxpayer to be able to complete an exchange. Modern day rules only require that the buyer of the old property and the seller of the new property receive written notice that the taxpayer has assigned the rights (but not the liabilities or obligations) to the qualified intermediary. No signature nor other affirmative action is required by the other parties. So unless the property is in one of the few states, like New York, where assignments are not permitted without a provision in the contract, they are otherwise freely assignable.</p>

<h2>So long as written notice of the assignment of rights is given to the buyer of the relinquished property and the seller of the replacement property, I have conformed to the requirements under the regulations.</h2>

<p>In most cases this is true. However the regulations state that all parties to the contract must be given written notice of the assignment. So in the case of multiple sellers or multiple buyers on the taxpayer’s side of a transaction, all co-sellers or co-buyers must also receive written notice for compliance. In one recent instance being handled by our office, the escrow agent was named as a party to the contract and the client’s attorney was instructed to ensure that the agent also received written notice of the assignment.</p>

<h2>Identification of replacement property has to be made to the qualified intermediary.</h2>

<p>Although it is most common to make the 45-day identification to the qualified intermediary, the regulations actually allow the identification to be made to the seller or “any other person involved in the exchange other than the taxpayer or a disqualified person.” Examples provided in the regulations include the buyer of the relinquished property, the intermediary, the title company and the escrow agent. So a valid indication can be made to these parties and not necessarily to the intermediary. For example, a provision in the replacement property contract could indicate that the buyer is identifying the property as his replacement property for his exchange.</p>

<h2>A taxpayer can direct the qualified intermediary to pay legal or accounting fees from the exchange account.</h2>

<p>Perhaps. Certain transactional costs can come from the exchange account however the expense must (i) pertain only to the exchange transaction and (ii) would be an expense that would “appear under local standards in the typical closing statement as the responsibility of a buyer or seller.” Attorney’s fees may typically appear on a closing statement in certain locales, but one would not expect to see accountant’s fees on a closing statement. Payment for transactional costs should be done with care and only if they fall within the above two prong test. Examples appearing in the regulations include real estate commissions, prorate taxes, recording or transfer taxes and title company fees.</p>

<h2>A taxpayer can pay loan-related costs for the replacement property from the exchange account.</h2>

<p>No. Not every cost associated with the acquisition of replacement property can be paid out of exchange funds. Remember, these are like-kind exchanges. Real estate is exchanged for real estate, not for loan costs. So such items as loan commitment fees, points, appraisal and credit reports should be paid from separate funds.</p>

<p><u>A limited liability company member or a partner in a partnership can do their own exchange upon sale of property owned by the LLC or partnership.</u></p>

<p>This is the most common question or misconception seen by qualified intermediaries. Unfortunately, the Internal Revenue Code does not allow an individual member or partner to do an exchange; it can only be done at the entity level. In order to get around this restriction, it was somewhat common to cause the LLC or partnership to deed a fractional interest in the property to the individual immediately before the sale so that she would not be selling in her capacity of a member or partner. The interest was “dropped” to her so she could “swap” it as part of an exchange. These are known as <a aria-label="Drop and Swap 1031 Exchange" href="/blog/1031-drop-and-swap-out-partnership-or-llc" title="Drop and Swap 1031 Exchange">Drop &amp; Swap</a> techniques. Because a proper exchange requires a period of “holding” the property before the sale, this technique is frowned upon by the IRS unless the “drop” takes place well in advance of the sale and ideally in advance of the property going under contract.</p>

<p><u>If multiple properties are being sold by one seller under one contract, they are considered one property for the purpose of the three-property rule</u></p>

<p>Probably not. If there are contiguous lots and multiple permanent index numbers, an argument can be made that they cannot be sold separately and therefor only constitute one property. However if they are not contiguous and/or are capable of being sold separately (despite the seller’s preference not to) they are likely considered separate properties for purpose of <a aria-label="1031 Exchange Identification Rules" href="/blog/what-are-rules-identification-and-receipt-replacement-property-irc-%C2%A71031-tax-deferred-exchange" title="1031 Exchange Identification Rules">this rule</a>. Taxpayers commonly identify Delaware Statutory Trust (DST) investments. A single investment might be comprised of a fractional share in a portfolio of properties. This is an example of each property being considered a separate property for purposes of the three-property rule (although it may still work under the separate 200% rule).</p>

<h2>Summary</h2>

<p>If you have questions about any of these points or want to get clear on other questions about how 1031 exchanges work, please contact us.&nbsp;We will be happy to provide more information.</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;No useful reason exists to think of or treat a closing like litigation although it does happen.&nbsp; Everyone involved needs to work together in a cooperative way to consummate the deal.&nbsp; Real estate law is a function of locality and custom in many respects; however, we will generally review some commonalities in the closing of a real estate transaction. &nbsp;</p>

<p>Most real estate transactions begin with a written contract and end with a closing.&nbsp; The following parties are typically involved in negotiating, performing and closing on the contract:</p>

<ul>
<li>Seller</li>
<li>Buyer</li>
<li>Real estate agents</li>
<li>Attorneys (depending on locality and complexity)</li>
<li>Lender (if not a cash deal or other financing arrangement)</li>
<li>Title company</li>
</ul>

<p>All agreements for the purchase and sale of real estate must be in writing.&nbsp; The contract sets forth the conditions under which the seller agrees to transfer and the buyer agrees to purchase the property.&nbsp; The contract may be lengthy or pithy, complex or straightforward, but its ultimate purpose is to convey ownership of the property to the buyer under mutually agreed upon terms. &nbsp;</p>

<p>Occasionally, a real estate transaction may involve an IRC Section 1031 tax-deferred exchange. The tax code and treasury regulations also provide certain rules that address <a href="/blog/all-tax-deferred-exchange-companies-are-not-created-equal">conveying real estate in a tax deferred exchange</a>.&nbsp; A qualified intermediary (QI) is generally required and is a person or entity that is not a “disqualified person” as defined under the tax code.&nbsp; For the most part, <a href="https://www.youtube.com/watch?v=Pi4l_dQgoh8&quot; target="_blank">a disqualified person</a> is someone who is under the control, or an agent, of the taxpayer.&nbsp; The QI enters into a written exchange agreement with the taxpayer pursuant to which the QI agrees to acquire and transfer both the relinquished (old) and replacement (new) properties to the taxpayer.&nbsp; For exchange purposes, these transfers to and from the QI can be accomplished if the party’s rights are assigned to the QI and all parties to the contract are notified in writing of the assignment on or before the closing date (see: <a href="/blog/case-study-forward-exchange-real-estate">Case Study: A Forward Exchange of Real Estate</a>).&nbsp;&nbsp;</p>

<p>On the date set forth in the contract, the parties will gather at a title company office to close the transaction.&nbsp; One of the seller’s most basic contractual duties is to convey the marketable title to the buyer.&nbsp; Title is “marketable” if it covers the entire property that the seller is purporting to convey to the buyer and is free of encumbrances that a reasonable buyer would not accept.&nbsp; In other words, it needs to be demonstrated that the seller actually owns the real estate and has a right to transfer ownership to the buyer free from unacceptable title defects. &nbsp;</p>

<p>The seller will prove the title is marketable by way of a title commitment or title report issued by a title insurance company.&nbsp; A title commitment is prepared by the title company (or attorney depending on locality) based upon a title search of the public records to see which documents have been recorded against the property.&nbsp; It is the seller’s obligation to remove or otherwise satisfy any unacceptable conditions not agreed to in the contract that may be set forth in the title commitment.&nbsp; Examples of unpermitted or unacceptable title exceptions may include mortgage, tax, mechanics’ liens, encroachments or other such encumbrances.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;</p>

<p>At closing, the seller will deliver properly executed and notarized conveyance documents and other documents to the buyer and title company.&nbsp; Examples of such closing deliverables may include the deed, bill of sale, plat of survey, and settlement statement.&nbsp; Possession of the real estate is usually surrendered to the buyer at the closing.</p>

<p>The buyer’s principal obligation at the closing is to pay the purchase price to the seller in consideration for the property.&nbsp; Unless it’s a cash deal, the buyer will typically procure a mortgage loan from a lender for purposes of financing all or portion of the purchase.&nbsp; The buyer’s lender will have its own documents and requirements that will need to be satisfied on or before the closing in order for the buyer to obtain the loan.&nbsp;&nbsp;&nbsp; &nbsp;</p>

<p>Lastly, the title insurance company plays an important part in a real estate closing on behalf of all the parties.&nbsp; The title company will waive, insure over, or otherwise resolve all matters set forth on the title commitment.&nbsp; If the buyer is utilizing a lender, the title company will review the loan documents, ensure they are accurate as well as properly executed, and obtain any required information or documentation from the parties.&nbsp; The title company also acts as the disbursing agent for the seller and buyer.&nbsp; At closing, the title company will collect the purchase proceeds from the buyer and its lender (if any) and disburse the funds as set forth in the final settlement statement.&nbsp; After the closing has occurred, the title company will issue an owners’ policy (and loan policy if applicable) in addition to sending certain documents of record, such as the deed and mortgage, to be recorded in the County Recorder of Deeds Office where the real estate is situated.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;</p>

<p>In sum, it is advantageous to know the parties and possess a knowledge of established procedures for purposes of effectively navigating the real estate closing process.&nbsp; The foregoing is especially important if the transaction qualifies for a tax deferred exchange under Section 1031. &nbsp;</p>

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