The Basics of Completing a 1031 Exchange in 4 Easy Steps

The 1031 Exchange process, also known as a “like-kind exchange,” is a tax strategy that allows real estate investors to defer paying capital gains taxes on the sale of a property by using the proceeds to purchase one or more replacement properties.

To complete the process, you will need to work with a Qualified Intermediary like Brazos1031 Exchange Company, who will guide you through each step that is required under the law. In general, however, a 1031 Exchange unfolds in four basic steps, which are as follows:

Step 1: Identify the property you want to sell

The first step in the 1031 Exchange process is to identify the property that you want to sell. This property is known as the “relinquished property.” It must be a property that is held for investment or use in a trade or business.

Step 2: Identify the replacement properties you want to purchase

The next step is to identify the properties that you want to purchase. These properties are known as the “replacement properties.” There are a few rules to keep in mind when identifying replacement properties:

  • You must identify the replacement properties within 45 days of selling the relinquished property.
  • You can identify up to three replacement properties without regard to their fair market value.
  • If you identify more than three replacement properties, the total fair market value of those properties must not exceed 200% of the fair market value of the relinquished property.

Step 3: Close on the sale of the relinquished property

Once you have identified the replacement properties, you can proceed with the sale of the relinquished property. You will need to use a qualified intermediary (QI) to facilitate the exchange. The QI will hold the proceeds from the sale of the relinquished property and use them to purchase the replacement properties.

Step 4: Close on the purchase of the replacement properties

The final step in the 1031 Exchange process is to close on the purchase of the replacement properties. The QI will use the proceeds from the sale of the relinquished property to purchase the replacement properties. Once the purchase is complete, the exchange is considered finished.

It’s important to note that the IRS has strict rules and timelines that must be followed to qualify for a 1031 Exchange. If you have questions, be sure to contact the professionals here at Brazos1031 Exchange Company to ensure that you understand all the rules and regulations.

In conclusion, the 1031 Exchange process is a powerful tool for real estate investors to acquire multiple replacement properties while deferring paying capital gains taxes. It can be a complex process and requires close attention to the rules and regulations set forth by the IRS, but with the help of our qualified intermediaries and professional guidance, it can be a successful strategy for growing a real estate portfolio. To get started with the process, contact us at (888) 508-1901.

Get Started Today

It is easy to get started on your exchange. You can either call our office directly at 888-508-1901, or you can fill out our Start Your Exchange form.
Start Your Exchange