Strict adherence to the legal requirements of Section 1031 of the Internal Revenue Code is required for a successful exchange. Investors should be aware of four basic requirements when entering into a delayed exchange, and should seek the advice of a tax accountant or attorney to ensure proper adherence to the

tax code. The four basic requirements for a successful exchange are:


Property Qualifications

The internal revenue code states that the properties involved in an exchange must be held for productive use in trade or business or for investment, and they must be “like-kind”.



The IRS provides a maximum of 180 days to complete an exchange. The timeline begins upon the close of escrow (COE) of the relinquished property. The new property (or properties) must be acquired on or before midnight of the 180th day. No Exceptions! In addition, the IRS requires that all potential replacement properties be identified by midnight of the 45th day of the exchange.



Identification of all potential replacement properties is required on day 45 of the exchange. Identification must be in writing and the description of the properties must be unambiguous. The IRS provides two rules for identifying replacement property:


The 3 Property Rule

The 3 Property Rule allows for identification of any three properties, of any price, anywhere in theUnited States.


The 200% Rule

The 200% Rule is an option for identifying more than three properties. With the 200% Rule, four or more properties can be identified. However, the combined value of all properties identified cannot exceed 200% of the property sold.


Tax Deferral

To defer 100% of the capital gains tax liability, two requirements must be met

a) Reinvest all the Cash - all the cash that was generated from the sale of the relinquished property must be reinvested into the new property or properties.

b) Purchase Equal or Greater in Value -  the new property (or properties) must be  equal or greater in value to the property sold.


The subject matter in this newsletter is intended as general information only and not intended as tax or legal advice.  Please always consult your tax or legal advisor for any specific tax or legal matters.


A commercial escrow is one that involves the transfer or encumbrance of property other than residential, such as office, research, retail and industrial properties.


Chicago Title recognizes that there is no such thing as an easy commercial transaction. Each transaction is unique and the main role of the settlement agent becomes that of a coordinator and problem solver. Often a transaction will become so complex that the settlement agent is the only person who has a grasp of the entire transaction and all closing requirements. Handling commercial escrows requires unique skills on the part of the settlement agent.

For documents commonly used to close a commercial real estate transaction, please refer to the Commercial Document Samples index below. Click on the link provided for a sample of the document you are searching for.

For more specific information regarding commercial real estate transactions and the processes and procedures required to successfully close, select from the Commercial Closing Topics index provided.

Commercial Closing Topics

   Opening the Escrow Transaction

   Fee Quotes

   Deposit Funds

   In General

   Coordinating Title Issues

   Information Gathering

   Organization Documents and Verifying Authority

   Demand/Lien Information

   Prorations

   Rents, Tenant Deposits and Estoppels

   Tax Deferred Exchange

   1099-S Reporting

   Property and Casualty Insurance Requirements

   Proformas

   Endorsements

   Re-Insurance

   Co-Insurance

   UCC Search

   UCC Filings

Opening the Escrow Transaction

An escrow transaction is commonly opened by the real estate agents or attorneys involved in the transaction. The specific transaction information required to open the order may be communicated to the escrow settlement officer by telephone, facsimile, by email or in person. The following minimum information is required at the time of opening:

   Sale Price/Loan Amount

   Property Address(es) and/or Legal Description

   Assessor’s Parcel Number(s) (if available)

   Policy Liability Amounts (if available)

   Owners/Borrowers

   Buyers

   Contact Information for Professionals (such as listing/selling agent, attorneys and lenders)


Fee Quotes

Escrow closing fees are provided by quote based on the closing location and the complexity of the transaction. To obtain a closing fee quote, use the Find an Office option located on this page to find an escrow closing office near you.


Deposit Funds

Commercial escrow deposits are typically large sums of money held for long periods of time. Frequently multiple deposits are required through the course of the transaction as contract contingencies are fulfilled. At the time of contract negotiations, the principals to the transaction will typically decide which party will be entitled to any interest earned on those deposits at the successful close or cancellation of the transaction.

The party entitled to the earned interest will have to complete an authorization provided by the escrow settlement officer, as well as a Form W-9 providing the taxpayer identification number for the earning party. These two documents are required by the escrow settlement agent and the bank that will be required to hold the deposit in trust on behalf of the escrow settlement agent and the principals.

The bank will report the interest earned to the Internal Revenue Service based on the taxpayer identification number provided.


In General

The escrow settlement agent will work closely with the principals and their representatives to ensure title issues are resolved, that authoritative documents are requested from the principals, future deposits and release of funds occur within the agreed upon time constraints.


Coordinating Title Issues

Escrow settlement agent will make requests for inspections, survey requirements, owner’s affidavit, leases (recorded and unrecorded) prior to closing the transaction.


Information Gathering

During the contingency period, the settlement agent will work to gather the information and documents necessary to prepare the closing statement and closing documents. The list of documents and information required by the settlement agent may be revised throughout the course of the transaction as documents and information are received, the terms of the purchase agreement change, or if the parties request any additional services or products.

The initial list of documents and information needed by the settlement agent are as follows:

   Organizational Documents for the Entities

   Copies of Leases

   Rent Roll with security deposits

   A list of service contracts or other items to be prorated at closing

   A list of personal property to be included in the Bill of Sale

   At least two (2) copies of the survey

   Original documents as attached as exhibits to the contract for execution at closing


Organization Documents and Verifying Authority

When the seller or buyer is not a natural born person, the settlement agent and title insurer must verify that the entity was properly formed and that the person(s) signing the documents are duly authorized and have the power to sell and/or loan money, or to buy and/or borrower money. If the closing documents are not signed by a duly authorized representative of the corporation, trust, company, partnership, etc., the transaction may be voidable.


Demand/Lien Information

The settlement agent will obtain information from the Seller for all existing liens which will have to be satisfied or removed at closing. This includes information on trust deeds or mortgages to be paid off, and also includes tax liens, judgments, and defects in title or unrecorded leases. If a Seller is deceased, probate documents will be required. A Seller in bankruptcy will need a court order.



There may be many items to prorate in a real estate transaction. As in any other transaction, how an item is prorated will depend upon whether or not it is paid in arrears or in advance.

Items to prorate at closing include:

   Real estate taxes

   Personal property taxes

   Special assessments

   Rents

   Property owner’s assessments

   Common area maintenance fees


Rents, Tenant Deposits and Estoppels

The Rent Roll is a list of tenants and units, rents due and delinquent, and tenant deposits. It is customarily obtained by the settlement agent from the seller or property manager. Rent may also include other items such as rental tax, liability insurance, common area maintenance, taxes, etc.

There are two distinct methods to prorate rents at closing:

1. Rents actually collected

2. All rents, as if collected

The purchase agreement should state the manner in which rents are to be prorated. If not, the settlement agent must ask the question of both sides of the transaction.

Tenant deposits are not prorated, however, the entire amount of the deposits are transferred from seller to buyer at closing in one of two ways:

1. charge (debit) the seller and credit the buyer (usual practice); or

2. charge the seller and issue a check to the buyer (by special request)

Tenant deposits may include such items as security or damage deposits and last month’s rent, which are usually itemized on the rent roll.

A Tenant Estoppel is a document signed by the tenant confirming the terms of the lease. By the nature of an “estoppel”, the tenant would be estopped (prevented) from asserting any other rights in the future other than those stated in the lease.

Tenant Estoppels are typically a contractual issue between buyer and seller. It is the responsibility of the seller to provide a form of Estoppel that is acceptable to the buyer, to obtain the tenants’ signature and to deliver the estoppels to the buyer.


Tax Deferred Exchange

Section 1031 of the Internal Revenue code of 1986 (as amended), offers real estate investors an opportunity to build wealth and save taxes. In a tax deferred exchange, the investor (Exchanger) can dispose of investment property and defer the capital gains tax by leveraging all their equity into replacement property. Two requirements must be met to defer the capital gain:

1. The Exchanger must acquire “like-kind property”

2. The Exchanger cannot take “constructive receipt of funds” (receive proceeds)

Here is what happens in such an exchange:

   The Exchanger must enter into an exchange transaction prior to closing on the relinquished property.

   The Exchanger enters into an Exchange Agreement with a Qualified Intermediary (Exchange Accommodator)

   The Intermediary acquires the relinquished property from the exchanger and transfers it to the buyer by a direct deed from the Exchanger

   The proceeds from the relinquished property are assigned to and held by the Intermediary in a separate, secure account.

   The Intermediary acquires the replacement property from the seller and transfers it to the Exchanger by a direct deed from the seller.

   The exchange funds are used by the Intermediary to purchase replacement property for the Exchanger.

There are strict time limits in which a tax deferred exchange must be completed with absolutely no extensions:

   The Exchanger has 45 days from the date the relinquished property closes to identify potential replacement properties in writing to the Intermediary. Once the 45 days has expired, the Exchanger may not change the property identification list and must close on one or more of the identified properties.

   The purchase of the replacement property must be completed within 180 days from the date of closing on the relinquished property.

Although property is deeded directly between seller and buyer, the Intermediary should be shown on the closing statement and should sign the closing statement on behalf of the Exchanger. The Exchanger approves the closing statement and typically signs all other closing documents.

An Exchanger may also enter into a “Reverse Exchange”, in which the replacement property is purchased prior to closing on the relinquished property.

A tax deferred exchange is also subject to 1099-S reporting and FIRPTA regulations and withholding.

There are many things an investor must consider when thinking about entering into a tax deferred exchange. Interested parties should contact a tax advisor or an attorney who specializes in tax matters, and to speak directly to a qualified exchange accommodator.


1099-S Reporting

The Internal Revenue Code requires that all proceeds from the sale or exchange of a real estate transaction be reported to the IRS. All real estate transfers are subject to 1099-S reporting, including commercial properties, regardless of whether or not there is any consideration paid for the property.

All transferors (sellers) are subject to 1099-S reporting, including individuals, estates/trusts, partnerships, sole proprietorships, limited liability companies. Even foreign sellers are subject to 1099-S reporting, regardless of whether or not FIRPTA taxes are withhold and paid. Corporations are not subject to 1099-S reporting.


FIRPTA – Foreign Investment in Real Property Tax Act

Section 1445 of the Internal Revenue Code requires that the transferee (buyer) must deduct and withhold a tax equal to 10% (or other amount) of the total amount realized (total sale price or consideration on the disposition of a U.S. real property interest by a foreign person (transferor/seller). Taxes and forms must be submitted to the IRS within 20 days of the transfer.

All real estate transactions/transfers, including exchanges, are subject to FIRPTA regulations; however, many commercial contracts contain provisions for the seller’s cooperation with FIRPTA compliance at closing.

There are ten (10) different FIRPTA exemptions, including the Non-Foreign Certification (refer to IRS publication 515). The foreign transferor must prove to the buyer and to the settlement agent that an allowed exemption applies to the transaction.

Because the buyer is held responsible by the IRS, the buyer should be kept in the loop regarding any matters pertaining to FIRPTA and foreign sellers. Many state’s (California and Hawaii) have their own FIRPTA regulations that are enacted if one or more of the properties are located within that state.


Property and Casualty Insurance Requirements

Insurance coverage is required to be evidenced at closing, if there is a new lender involved in the transaction. Sometimes the lender's attorney will deal directly with the insurance company. The settlement agent will require contact information for the buyer’s insurance agent prior to closing.

Depending on the type of property, and the Buyer, the method of paying insurance premiums can vary. A large client may have master policies and no premiums will be paid in escrow. A buyer may set up an installment and only a portion of the premium will be paid through escrow.



A lender or attorney may request a “proforma”. What they are asking for is a sample policy and samples of the endorsements they require at closing. The title examiner will prepare the “proforma” for delivery to the parties to the transaction.



An endorsement is a provision added to a policy of title insurance that restricts or enlarges the scope of coverage. Depending on state law, endorsements may be customized to meet the particular needs or concerns of the proposed insured or the nature of the property to be insured, and may be applicable to either the owner’s or the lender’s policy, or both.

Whenever a title company is asked to issue an endorsement, there may be certain conditions that must be met before the endorsement can be issued. All endorsements are subject to approval by the title underwriter



The title insurer will insure up to the total sale price or loan amount, and then employs another title insurance company to insure them. The premium paid to the re-insurance title company is deducted from the title fees; it is not an additional charge to the parties. Re-insurance is handled by the Title Department when requested by the proposed insured or is required based upon self-imposed or statutory title insurance limits.



The proposed insured may allow the title insurance company to insure only up to a certain amount (i.e. not the total sale price or loan amount). The remainder of the sale price or loan amount would then be insured by one or more other title insurance companies. When there is co-insurance, the customer is charged based upon each company’s filed rates for the portion of the total liability covered by that company. The co-insurance company may be chosen by the customer.


UCC Search

A Uniform Commercial Code (UCC) search is conducted through the Secretary of State for any Financing Statements that may have been filed to perfect a lien on personal property in accordance with the Uniform Commercial Code. The search is conducted on name(s) of the Debtor(s) as well as the location of the property. This search is not a part of the preliminary report or commitment provided by the title insurer, but an outside provider company that specializes in such reports. There is an additional cost for the UCC Search, which cannot be determined until after the search is completed and provided to the settlement agent.

A UCC Search through the Office of the Secretary of State is not conducted unless required under the terms of the purchase agreement or requested by one of the parties. The names to be searched must be provided to the settlement agent if any name other than the seller or buyer as it appears on the purchase agreement or preliminary report/title commitment are to be included in the search. The settlement agent needs to be provided the names to be searched in writing by the requesting party. The cost of the final report must be paid for by either buyer or seller. If the report is produced early in the transaction processing period, it may need to be updated prior to closing, resulting in additional charges.


UCC Filings

Many lenders will require a UCC-1 Financing Statement to utilize personal property as additional security for their loan. A UCC-1 Financing Statement may be recorded in the County in which the real property is located. The UCC-1 is typically recorded concurrently with and after the deed of trust or mortgage instrument or as instructed by the lender.

A UCC-1 Financing Statement should be filed with the Secretary of State in the jurisdiction of the location of the debtor. Enforcement of a debt secured with a UCC Financing Statement comes under the Uniform Commercial Code. It is actually the state filing that perfects the lien. In the case of an individual, it should be filed in the state in which they reside. In the case of a legal entity, it should be filed in the state in which the entity was organized. For example, if the debtor has its primary residence in Arizona, the UCC-1 would be filed with the Arizona Secretary of State. If the Debtor is a California Limited Liability Company, the UCC-1 would be filed with the California Secretary of State.

The Secured Party and the Debtor should determine the location of recording and or filing of the UCC statement. The completed UCC-1 Financing Statement is normally provided by the lender.

UCC-1 Financing Statements do not have to be signed by either the Debtor or Secured Party; however, they must be authorized. This means that the parties must instruct the settlement agent, in writing, to record the UCC with County Recorder and/or to file it with the Secretary of State, naming the county recorder and the state jurisdiction.

Although the UCC-1 Financing Statement does not require signatures, any attachment such as the legal description or special terms and conditions may require the signature of the Debtor.

A UCC-1 Financing Statement expires after five (5) years, unless a continuation is recorded and/or filed. It is the sole responsibility of the Secured Party to determine if a continuation is necessary and to record and/or file any continuation statement.









Title to real property in California may be held by individuals, either in Sole Ownership or in Co-Ownership. Co-Ownership of real property occurs when title is held by two or more persons. There are several variations as to how title may be held in each type of ownership. The following brief summaries reference seven of the more common examples of Sole Ownership and Co-Ownership.


   A man or woman who is not married.

Example: John Doe, a single man.

   An Unmarried Man/Woman:

A man or woman, who having been married, is legally divorced.

Example: John Doe, an unmarried man.

   A Married Man/Woman, as His/Her Sole and Separate Property:

When a married man or woman wishes to acquire title as their sole and separate property, the spouse must consent and relinquish all right, title and interest in the property by deed or other written agreement.

Example: John Doe, a married man, as his sole and separate property.


   Community Property:

Property acquired by husband and wife, or either during marriage, other than by gift, bequest, devise, descent or as the separate property of either is presumed community property.

Example: John Doe and Mary Doe, husband and wife, as community property.

Example: John Doe and Mary Doe, husband and wife.

Example: John Doe, a married man

   Joint Tenancy:

Joint and equal interests in land owned by two or more individuals created under a single instrument with right of survivorship.

Example: John Doe and Mary Doe, husband and wife, as joint tenants.

   Tenancy in Common:

Under tenancy in common, the co-owners own undivided interests; but unlike joint tenancy, these interests need not be equal in quantity and may arise at different times. There is no right of survivorship; each tenant owns an interest, which on his or her death vests in his or her heirs or devisee.

Example: John Doe, a single man, as to an undivided ¾ ths interest, and George Smith, a single man as to an undivided 1/4th interest, as tenants in common.

   Trust:

Title to real property in California may be held in trust. The trustee of the trust holds title pursuant to the terms of the trust for the benefit of the trustor/beneficiary.

The preceding summaries are a few of the more common ways to take title to real property in California and are provided for informational purposes only.

There are significant tax and legal consequences on how you hold title. We strongly suggest contacting an attorney and/or CPA for specific advice on how you should actually vest your title.


The comparison below is provided for information only, it should not be used to determine how you hold title. We highly recommend that you seek professional counsel from an attorney and/or CPA to determine the legal and tax consequences of how title is vested.




The Preliminary Report is an offer to issue a policy of title insurance covering a particular estate or interest in land subject to stated exceptions.

Since these exceptions may point to potential problems with your intended purchase, it is important for all parties to review the report once it is received.

A Preliminary Report provides a list of the matters which will be shown as exceptions to coverage in a designated policy or policies of title insurance, if issued currently, covering a particular estate or interest in land. It is designed to provide an interim, or "preliminary" response to an application for title insurance and is intended to facilitate the issuance of the designated policy or policies. It is normally prepared after application (order) for such policy(ies) of title insurance on behalf of the principals to a real property transaction, for the purpose of facilitating requirements relative to closing and policy issuance in form and content approved by those parties.

If a title policy is not contemplated, a Preliminary Report should not be ordered. Instead, consideration should be given to requesting a Condition of Title Report or other similar title product.

The Preliminary Report states on its face that it is made solely to facilitate the subsequent issuance of a title insurance policy and that the insurer assumes no liability for errors in the report. Accordingly, any claim arising from a defect in title must be made under the title policy and not the Preliminary Report.

After a title order has been placed, matters relative to the title policy coverage on the subject property are assembled in a title search package and examined by skilled technicians. This is when the Preliminary Report is prepared and sent to the customer. The report contains relevant information so that the parties to the transaction will become aware of matters which will not be insured against by the title company. This report is issued before the title policy, hence the name Preliminary Report.

The matters shown in the report are as follows:

   The estate of interest covered.

   The owner of the estate or interest.

   The parcel of land involved.

   The exceptions, liens, encumbrances and other risks which will not be insured against if a title policy is issued.

   Other requirements and provisions which are reflected as "Notes" in the Preliminary Report which are removed if and when a title policy is issued.