101 Exchange

1031 Exchange


1.Consider hiring professionals to assist you

In order to conduct a 1031 exchange—and safely navigate the complexities of the relevant provisions of the Internal Revenue Code—you should either (1) have a sophisticated understanding of the portions of the United States Code governing 1031 tax-deferred exchanges or (2) find a qualified professional to assist you. Because tax laws change and new tax regulations are issued periodically, your best bet for a successful 1031 exchange is to enlist the help of a professional.

  • An attorney, tax specialist, or accountant will not only help you understand exactly what you need to do in order to conduct a valid 1031 exchange but can also ensure that you don't make any mistakes during the process.
  • A real estate agent will also be helpful—especially if they have been a part of a 1031 exchange before—and should know what language to insert in the relevant contracts to make the exchange go as smooth as possible.
  • As soon as you decide to conduct a 1031 exchange, be sure to tell any professionals you will be working with during the exchange (i.e., your attorney, your real estate agent, etc.) of your intent so they can properly assist you in conducting the transaction.



2.Select a Qualified Intermediary

A key aspect of a 1031 exchange is that you are not simply selling one property and then using the proceeds from that sale to buy another. Rather, the selling of the relinquished property and buying of the replacement property is conducted as one transaction. To achieve this, you will generally use what is known as a "Qualified Intermediary"—a third party that will handle the funds throughout the exchange—to conduct the transaction.

  • Generally, you will use either a bank or a law firm as your Qualified Intermediary.

3.List your relinquished property ( Old property) 

Find a buyer for the property you wish to sell. This property—commonly referred to as the "relinquished property," because this is the property you will be giving up in exchange for another—is the property you will be exchanging for another in this transaction in order to defer capital-gains taxes.Your next step, then, is to find someone who is willing to purchase your property at the amount at which you wish to sell it.

  • Once you have found someone willing to purchase your relinquished property, you will enter into a Purchase & Sale Agreement with the buyer.


4.Enter into an Exchange Agreement with the Qualified Intermediary

Once you have identified a Qualified Intermediary you wish to use, you will enter into an Exchange Agreement with the Qualified Intermediary. This agreement will allow the intermediary to receive the funds from the sale of your relinquished property, hold those funds, and then eventually use them to purchase your replacement property.

  • The reason for this is that, to receive the tax-deferment benefits of a 1031 exchange, you must not have direct control over the funds from the sale of your relinquished property, otherwise the IRS will treat this as a sale and subsequent purchase—not a 1031 exchange.
  • This agreement should provide that you will be assigning seller's rights for the relinquished property and buyer's rights for the replacement property to your intermediary, so it can act on your behalf without you ever directly controlling the funds involved in the exchange.
  • You must enter into this agreement with a Qualified Intermediary before the closing date for the sale of the relinquished property.


5.Identify a property or properties you wish to buy.

This property—commonly referred to as the "replacement property," because this is the property that will be replacing your relinquished property—is the property you will be acquiring with the proceeds from the sale of your relinquished property in order to defer capital-gains taxes. You must identify the replacement property/properties in writing, sign the document, and deliver it to your Qualified Intermediary within the 45-day timeframe.

  • You may identify up to three potential replacement properties regardless of their value. If you wish to acquire more than three replacement properties, you may identify more than three potential replacement properties so long as the total fair market value of your identified properties does not exceed 200% of the sale price of your relinquished property.
  • This replacement property/properties should have a fair market value greater than or equal to your relinquished property in order for the exchange to be completely tax-deferred.
  • If the replacement property is real property, you must provide the street address and name of the property in your written identification.
  • You have 45 days from the sale of your relinquished property in which to select and identify replacement property.

6.Direct your Qualified Intermediary to enter into a Purchase & Sale Agreement with the seller of your replacement property

The next step is to have your intermediary enter into a sale agreement with the seller of your replacement property. Your intermediary will, according to your Exchange Agreement, use the funds it received from the sale of your relinquished property to buy the replacement property. The seller will deed the property to you, receive payment from the intermediary, and then you will receive your replacement property.[17]

  • This Purchase & Sale Agreement should include specific 1031 language, similar to the Purchase & Sale Agreement for your relinquished property.

You must complete the exchange and receive title to your replacement property within 180 days of the sale of your relinquished property or the due date of the income-tax return for the year in which such property was sold—whichever date is earlier.


7.File IRS Form 8824

After you complete the exchange, in order to receive the tax-deferment benefit of the exchange, you must complete and file IRS Form 8824—Like-Kind Exchanges—in the tax year in which the exchange occurred.

  •    This form is available online via the IRS' website.


8.Comply with applicable state-reporting requirements

A Section 1031 exchange is a product of federal law, which is why you must report such an exchange to the IRS. Certain states, such as California, also have state-reporting requirements for 1031 exchanges conducted in their territory.[21] You will have to complete and submit an additional form in order for your 1031 exchange to comply with the laws of your state.

  • Tax law is quite complex, and the best way to find out if your state has a 1031 reporting requirement is to consult with an experienced tax attorney.
  • You can also try searching for this information online using the phrase "<> 1031 reporting" and looking over the results to see if any state websites provide forms for state-reporting purposes.