1031 Exchange Process
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1031 Exchange Process: Step-by-Step
The IRS strictly limits how much time you get to complete a 1031 exchange.
You must follow these rules.
And you need to be able to prove it.
Let’s take a 1000-foot view. From the exchanging party’s perspective, the process looks something like this.
Contact your QI
Sign agreement
Close on sale
Escrow proceeds
Identify replacements
Contract to buy
Close on Purchase
It REALLY helps to be organized if you want to pull this off without a hitch.
Bottom line?
Most exchanges fall into two categories
- A smooth, stress-free (and tax-free!) exchange…
- …or an exchange full of fits, starts, and panic.
We’ve seen taxpayers so disorganized that their exchange ended up failing.
It’s an expensive mistake.
And it’s so easy to avoid!
(Put simply, timing and planning are important)
We take your 1031 exchange process very seriously. It has to be detailed, efficient, and safe. Once you plan for this, the exchange process is actually quite relaxing and enjoyable.
Example #1: Failed 1031
Imagine this.
You are going to sell a commercial property.
The sale closes on March 1.
- You call the closest 1031 company on February 28.
- They rush to get an escrow account open.
You sell.
And your 1031 deadlines begin counting down.
- You start looking for replacement properties on March 2.
- You want something off-market, so you start calling around and flipping through social media.
A month passes quickly.
Then another week.
It’s April 9.
- You call the 1031 company to check on your deadline.
- They say “You have less than one week to identify”
After a few frustrating days, you decide that you’re going to eat the taxes.
Now you owe the IRS more than $250,000 in capital gains taxes.
(And you haven’t even calculated your depreciation recapture)
Of course, this is just an example. You may think it sounds dramatic or over-simplified. But make no mistake, these haphazard exchanges are very common in the 1031 world.
Don’t get caught unprepared!
Example #2: Successful 1031 Exchange
Let’s try again.
You are going to sell a commercial property.
The sale closes on March 1.
- You find the right 1031 company after you sign the PSA on January 3.
- Your QI walks you through your exchange options
- Figure out your potential tax liability.
- Encourage you to start looking for replacement properties right away.
- Coach your agent, CPA, and title closer through the process.
- Keep their ears open for potential landing spots for you.
- You read through your 1031 agreements before you sign them.
You sell.
And your 1031 deadlines begin counting down.
- You know when your deadlines are.
- Identify by April 15.
- Close on your purchase(s) by August 28.
(Pro Tip: Just google “[X] days from [sale date]”)
(The answer pops right out)
Back to the story.
You now list properties that you’re interested in. Your QI helps you stay within the limits.
For example, the second property you list goes off the market on April 3.
“No problem!” says your QI.
“We’ll take that off the list and you still have until April 15 to identify a replacement.”
You enter into a contract to purchase one of your ID’d properties on June 4.
- You tell your QI.
- QI coaches your agent, lender, and new closer.
- The original closing is scheduled for July 20.
On July 1, the seller says they need to push up closing to July 8.
- Since your QI already gave out instructions, everyone is ready to move fast.
You close on a new $3.5M property July 8.
1031 exchange complete!
Taxes deferred.
Now all of your gains keep working for you.
Onward and upward.
Final Thought:
A good QI will process hundreds or thousands of exchanges each year. Rely on your intermediary to keep your exchange organized rather than tackling the IRS yourself.
Learn to Master 1031 Exchanges
Whether you are brand new, or need an advanced strategy, this is your go-to center for Section 1031 Exchanges.
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