Real Estate Deal Analysis & Advice

The 10-Step Process to Perform a 1031 Exchange

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Let's walk through the step by step process for carrying out a 1031 exchange. Be aware that the following is just a general outline, so specific deals will likely vary slightly from this process.

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The 10-Step Process to Perform a 1031 Exchange

1. Decide to sell and do a 1031 exchange.

Not every purchase is worth doing a 1031 exchange. After all, with all the requirements, costs, and countdown timers, simply paying the tax and moving on may be advantageous. That is definitely a discussion for you to have with your accountant.

2. List your property for sale.

You then list your property for sale, as you ordinarily would. Your agent will likely include language in the listing paperwork regarding your desire to do a 1031 exchange and the buyer's needed willingness to play along.


Related: 4 Rules of 1031 Exchanges Every Investor Should Know

3. Begin looking for replacement properties.

Remember, the moment the relinquished property is sold, the 45-day countdown begins. Therefore, you should begin looking for deals immediately.

4. Find a qualified intermediary.

Look for someone professional with a good reputation.

5. Negotiate and accept an offer.

When someone agrees to buy your property, you will need to make sure the paperwork clearly states that a 1031 exchange is taking place on your end, and the buyer will need to comply. Although the buyer does not need to do a lot of work, they may need to sign off on certain paperwork, such as assignments or disclosures.

6. Close on the sale of your relinquished property.

The title company or attorney will handle the closing, as with any other real estate transaction, except that your qualified intermediary will be actively involved in the process, and the funds will transfer to their bank account, not yours.

7. Identify up to three properties within 45 days.

Now is the time to officially designate the properties you might pursue. Keep in mind, you can identify up to three properties, or more if you close on 95% of them or the total combined value of the identified properties is less than 200% of the sales price of your relinquished property.


Related: 2 Make-or-Break Rules to Follow for a Successful 1031 Exchange

8. Sign a contract on the first-choice property.

Most likely, of the three properties you identify, one will stand out as your first choice. You will need to get that property under contract and open escrow, making sure the seller knows you are purchasing through a 1031 exchange. You could also go under contract on all three of your identified properties, using contingency clauses to back out on the ones you later decide not to pursue.

9. Let your qualified intermediary work with the title company.

You, your agent, and your qualified intermediary will work with the title company or closing attorney to make sure to dot all the Is and cross all the Ts. This is actually a fairly simple process, one that your qualified intermediary should be familiar.

10. Close on the replacement property.

Finally, the qualified intermediary will wire your money over to the title company or attorney, and the property will close as in a normal transaction, deferring your need to pay the taxes until some point in the future, if ever. (I’ll talk about the “end game” in a moment.) The beauty of the 1031 exchange is that you can repeat this process over and over again on properties and continue deferring taxes indefinitely. This can help you build some serious wealth over time, greater than if you simply paid the taxes each time.

Any questions or comments about 1031 exchanges?

Be sure to leave them below!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Alik Levin Investor from Woodinville, WA
    Replied about 3 years ago
    Very nice and clean breakdown. I am considering 1031 next in my real estate journey, most probably in early 2018 around spring season. This article helps me seeing the trees from the forest and enables me build my plan and then zoom in and ask deeper questions quickly as needed. Thank you.
    Tom Shepard Investor from Brentwood, Tennessee
    Replied about 3 years ago
    Thanks for the informative article Brandon! Does anyone know if the fees for the exchange are usually flat fees or a percentage of the selling price?
    Jake Jefferies Property Manager from Los Altos, CA
    Replied about 3 years ago
    If you are referring to the cost for the “starker” or intermediary company, they are typically a flat fee. I believe around $750 is pretty standard.
    Replied about 3 years ago
    The only thing I would suggest is try identifying your new acquisition property as early as possible. Deals fall through and you don’t want to be in the position of buy a property because of a deadline.
    Joshua Shockley Investor from Hoover, Alabama
    Replied almost 3 years ago
    Good info. Besides the obvious difficulty in selling two properties at once; could one sell two properties and 1031 the proceeds from both of those units into one other unit?
    Michael Hang Developer from Birmingham/Austin
    Replied 3 months ago
    Yes you can!
    Adam Cuevas
    Replied over 2 years ago
    Don’t think so. Here’s what I found in another article WHAT DOES NOT QUALIFY FOR A 1031 EXCHANGE? Property held for productive use in a trade or business or for investment qualifies for a 1031 Exchange. The tax code specifically excludes some property even if the property is used in trade or business or for investment. These excluded properties generally involve stocks, bonds, notes, securities and interests in partnerships. Property held “primarily for sale” is also excluded. This excluded property would include business inventory. For real estate, it means property purchased with the intent to sell it, such as a fixer-upper or vacant land to be developed into a house. An investor who “turns” residential properties, or a private developer, may be classified as dealer. A primary residence usually does not qualify for an exchange because it is not used in trade or business or investment. That said, that portion of the primary residence that is used in a trade or business or for investment may qualify for a 1031 Exchange.
    Tim Daunch Flipper/Rehabber from Cleveland, OH
    Replied over 2 years ago
    I “sold” a house using a land contract 7 years ago. The buyer is approaching their last payment in the next few months, which will trigger title transfer. I did not record the land contract with the county. I purchased a 12-unit apt. bldg. a year ago on a lease-purchase. We are in financing now to complete the purchase. It occurred to me that I might want to use a 1031 to defer the taxes on the appx $40k proft (e.g., bought the house for 35k, sold it for 75k) by exchanging the house for the apartment bldg. However, since I took payments in monthly installments, of course I didn’t just stick those $40k in payments in the bank, hence no lump sum at closing to transfer to the intermediary. I do have other cash that I could use in lieu of. Is this feasible or just too complicated?
    Isaac Agbolosoo Rental Property Investor from Grosse ile, MI
    Replied over 1 year ago
    On step # 3: Begin Looking for Replacement Properties: Remember, the moment the relinquished property is sold, the countdown of 45 days begins. Therefore, begin looking for deals immediately. Does the investor has to find and close on a deal within 45days or find and sign the PA within 45days? What if the next home closes beyond 45days?
    Dave Malone Lender from Nashville, TN
    Replied 11 months ago
    I was told it is possible to act as your own intermediary if you open a separate non interest earning account. Has anyone done this?
    Pamela Dane Murphy
    Replied 5 months ago
    Hello Brandon, I am currently closing on the sale of my house in Oregon. Profit: over $100, 000.00. No one has lived in the house (never used as a rental property) in the last 2+ years. In that time, I have lived and worked in Washington State (Washington has been my permanent residence for 2+ years). My plan in 2020 is to purchase land in Washington State and build a small home using the profits from the sale of my home in Oregon. My Questions: Do I need to complete at 1031 for the State of Oregon? And pay a capital gains tax in 2020 tax filing? Washington State does not have personal income tax or, Oregon does. I will be filing my personal Washington State Taxes for 2019 and 2020. Thank you in advance for your advice. D. Murphy