What are the Typical Steps in a 1031 Exchange?

When a real estate investor calls our Qualified Intermediaries about doing a 1031 exchange, they almost always lead with the same question: “What do I actually have to do to pull this off?”

The Typical 1031 Exchange Process

Good news: the process looks about the same for everyone, anywhere in the country. Here’s how a typical exchange plays out, step by step.

1. Sign the sale contract. You agree to sell your current property, which we call the “relinquished property.” The contract looks like any normal real estate contract, with one addition: a “cooperation clause” where the buyer agrees to sign whatever your exchange needs at closing.
2. Close on the sale. This closing works like any other, just with a few extra documents. The difference is you don’t walk away with a check. Instead, the proceeds get wired to your 1031 exchange agent, who holds them for you until you buy your next property.
3. Identify your replacement property. From here, the clock starts. You have 45 days to identify your replacement property and put it on your identification sheet, and 180 days total to close on it.
4. Sign the purchase contract. Next you go under contract on the replacement property. It looks a lot like the sale, with a few extra forms confirming cooperation on both sides.
5. Close on the replacement. At closing, your exchange agent wires the funds they’ve been holding to the title company. Once everything settles, the deed comes to you and your exchange is done.
6. Report it on your taxes. Finally, you report the exchange on your tax return after all the properties have changed hands.

Sound Complicated? Don’t Worry

Here’s the part that takes the pressure off. The IRS requires you to use a Qualified Intermediary, sometimes called a 1031 exchange agent, for every exchange, and their whole job is to guide you through the steps above. So even if it looks like a lot, you won’t be doing it alone. Your agent stays with you the entire way and makes sure you don’t miss a signature, a deadline, or a rule.

Have questions about the steps, or want help getting started with your own property? Our Qualified Intermediaries are here for you. Call 888-508-1901 to set up a consultation.

Chris Peterson — Texas Licensed Attorney & Founder, WealthBuilder 1031

Chris is the Owner and President of WealthBuilder 1031 and a licensed Texas attorney. He graduated from Wheaton College and the University of Texas School of Law and speaks regularly to realtors, accountants, and title companies about 1031 exchanges. Learn more →