A Typical Exchange Timeline
Understanding the exchange process from start to finish. Follow these three phases to successfully complete your 1031 exchange.
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Phase I
Sale of Relinquished Real Property
A. Contract Stage
- 1Negotiate and sign your purchase and sale agreement (PSA) as seller.
- 2Include language in your PSA to establish your intent to exchange: "Seller intends to complete a 1031 Exchange and buyer agrees to cooperate with seller regarding the exchange at no additional cost or liability to buyer."
B. Closing Stage
- 1Call us when you have a signed purchase and sale agreement.
- 2We will need: contact information for escrow, your contact information, a copy of your PSA, and whether you wish to receive any cash directly from escrow at closing (this amount will be taxable to you).
- 3We contact escrow and send exchange escrow instructions to them.
- 4We prepare an exchange agreement, a qualified escrow agreement, and banking documents and obtain your signatures.
- 5The transaction closes and funds are wired into your exchange account.
Phase II
Written Identification of Replacement Properties
The 45-Day Identification Period
- You have 45 calendar days from the closing of the relinquished property to identify a list of possible replacement properties.
- You have the lesser of 180 days or the date your tax return is due (including extensions) to complete your exchange by purchasing one or more of those properties.
- By this time, you should already be looking for replacement property.
- You must provide us with a signed, written property identification before midnight of the 45th day from the closing of the relinquished property.
Critical Deadline
Extensions are not allowed except in the event of a federally-declared disaster. If you haven't closed on a new property and spent all the exchange proceeds within 45 days, you must have your signed, written identification list delivered to us before midnight on the 45th day.
Identification Rules
Three Property Rule
You can identify up to three potential replacement properties without regard to their value.
200% Rule
If you wish to identify more than three potential replacements, the total value of everything identified must be no more than 200% of the value of the property or properties relinquished.
95% Rule
You can identify more than three properties whose value exceeds 200%, but you must acquire properties totaling at least 95% of the value of all properties on the list. Few people use this rule.
What must the identification include?
- The property address, legal description, or other means of specific identification
- Must be in writing and signed by the taxpayer
- Must be delivered to a person involved in the exchange before the deadline
- You may change your identification until the 45th day expires—after that, no changes are possible
Phase III
Purchase of the Replacement Real Property
A. Contract Stage
- 1Negotiate and sign your PSA as buyer of the replacement property.
- 2Include language in your PSA to establish your intent to do a tax deferred exchange: "Buyer intends to complete a 1031 Exchange and seller agrees to cooperate with buyer regarding the exchange at no additional cost or liability to seller."
B. Closing Stage
- 1Call us when you have a signed purchase and sale agreement.
- 2We will need: contact information for escrow, a copy of your PSA, and whether you would like earnest money wired to escrow from your exchange account.
- 3We initiate a wire to escrow of the funds necessary to close your purchase. You approve it. We send our 1031 escrow instructions to escrow.
- 4We provide a final letter and a reconciliation between the exchange account and settlement statements.
The 180-Day Rule
You must purchase one or more of the replacement real properties by the 180th day after closing of the relinquished property, or the date that your tax return falls due (including extensions), whichever occurs first. You must purchase one or more of the real properties listed on your 45-day identification list—you cannot buy property not listed.
Important Considerations
Key points to keep in mind throughout your exchange
Equal or Greater Investment
To defer 100% of the gain, you must buy qualifying replacement property of equal or greater value:
- Use all net proceeds from the relinquished property
- Replace any debt relief with new debt or additional cash
Same Taxpayer Requirement
The taxpayer who owns the relinquished real property for federal tax purposes must acquire the replacement real property. If ABC partnership owns the relinquished property, ABC partnership must acquire the replacement property. If you and your spouse own the relinquished property, you and your spouse must acquire the replacement property.
Tax Return Timing
If you close your relinquished property late in the year, your tax return due date may come before your 180 days are up. In this case, you must file an extension of your tax return to have your full 180 days to complete the exchange.
Taking Cash Out
Can you take money out at closing? Yes—but this "boot" is taxable. It must be paid by escrow directly to you at closing. Once the QI receives the proceeds, you may no longer receive any portion of them without disqualifying the exchange.
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