The Complete 1031 Exchange Process, Step by Step

1. Hire a Qualified Intermediary (QI) — before you close on the sale. This is the single most time-sensitive step: your exchange must be structured *before* the sale of your relinquished property closes. If you close first and try to set up the exchange afterward, it's too late — the exchange is void. 2. Sell your relinquished property. The QI receives the sale proceeds directly at closing. You must never have actual or constructive receipt of the funds — if the money touches your bank account, even briefly, the exchange fails. 3. Identify replacement property in writing within 45 calendar days. The clock starts on the closing date of your relinquished property (not the day you decide to do an exchange). This identification must be delivered in writing, signed, to your QI — a verbal mention to your broker doesn't count. 4. Close on the replacement property within 180 calendar days. This is a single combined clock with step 3 — you don't get 45 days plus a separate 180 days; the 180-day period runs concurrently from the same start date. If your tax return for the year is due before day 180 (and you haven't filed an extension), that earlier date applies instead. 5. The QI transfers the funds to close on the replacement property. The same taxpayer/entity that sold the relinquished property must be the one acquiring the replacement — this is called the "same taxpayer" rule. 6. Report the exchange on your tax return (IRS Form 8824). Your CPA will need the closing statements from both transactions.

You don't have to pick just one replacement property. The IRS allows one of these identification approaches: - The 3-Property Rule: Identify up to three potential replacement properties, regardless of their combined value. - The 200% Rule: Identify more than three properties, as long as their combined fair market value doesn't exceed 200% of the value of the property you sold. - The 95% Rule: Identify any number of properties of any value, as long as you actually acquire at least 95% of the total value identified. Most investors use the 3-Property Rule with a primary target and one or two backups in case the deal falls through in due diligence.

The QI holds your sale proceeds for the entire exchange period, so this isn't a decision to make on price alone. A few things worth checking: - Who is legally disqualified from serving as your QI: Your attorney, CPA, real estate agent, or broker from the past two years, your close family members, or any entity you or your family control more than 10% of — none of these can serve as your QI. - How your funds are held: Ask specifically whether proceeds sit in a segregated, qualified escrow account (safer) versus commingled with the QI's general operating funds (riskier if the QI runs into financial trouble). - Fidelity bond and errors & omissions insurance: A reputable QI firm carries both — ask for proof, don't just take their word for it.

- Setting up the QI after closing — the most common and most fatal mistake; there's no fixing this after the fact. - Touching the sale proceeds, even briefly — this immediately disqualifies the exchange (known as "constructive receipt"). - Assuming the 45-day or 180-day deadlines can be extended — they generally cannot, except in federally-declared disaster areas. - Waiting until after closing to start looking for a replacement property — 45 days moves fast, especially in a competitive market; start your search in parallel with marketing your relinquished property, not after it sells. - Identifying only one property with no backup — if that deal falls apart in due diligence, you may run out of time to identify a replacement within the 45-day window.