Steps to Successfully Completing a 1031 Exchange

December 15, 2023
1031 National Services

Successfully completing a 1031 exchange provides the opportunity to achieve significant tax savings when buying and selling like-kind properties. But, to achieve these tax savings, you need to take several steps—and to show the IRS that your transaction qualifies as a like-kind exchange, you must take them both in order and on time. Working with a 1031 exchange expert can help ensure that the process goes smoothly and that you have the documentation you need to withstand IRS scrutiny if necessary.

7 Steps in the 1031 Exchange Process

Here is an overview of the steps involved in successfully completing a 1031 exchange:

1. Identity the Property You Want to Sell

The first step in the process is to identify the property you want to sell. In many cases, this will be straightforward, but if you have multiple properties that you are prepared to sell, then you will want to make a strategic decision based on the value of your existing properties, the value of the property you want to buy, and various other factors. If you aren’t sure which property you want to sell, or if you aren’t sure whether your existing property qualifies for a like-kind exchange, an experienced 1031 exchange expert can help.

2. Identify the Property You Want to Buy

The next step is to identify the property you want to buy. This is where timing starts to become very important. Strict deadlines apply to 1031 exchanges, and while you don’t want to identify a replacement property too soon and have it bought out from under you, you also don’t want to run out of time to close on your replacement property and secure the tax benefits under Section 1031. With this in mind, once you decide to sell, you should focus on identifying the property you want to buy and closing both transactions as efficiently as possible.

3. Work with a 1031 Exchange Expert to Develop Your Timeline

Once you’ve identified the properties that you want to use to execute your like-kind exchange, you will want to work with a 1031 exchange expert to develop your timeline, schedule and overall strategy. An experienced expert will be able to manage the process for you while helping you take all of the steps necessary to indefinitely defer your tax liability under Section 1031.

4. Execute the Sale Contract for Your Existing Property

Next, it is time to execute the sale contract for your existing property. While this will primarily involve working with your broker or real estate agent, you will want to keep in touch with your 1031 exchange expert during your negotiations—and you will want to consult with your expert regarding any contingencies or other factors that could impact the timeline.

5. Open the Exchange with a Qualified Intermediary

After getting under contract on your existing property, it is time to open your 1031 exchange. This involves working with a qualified intermediary that will hold the proceeds of the sale until they can be disbursed to pay for your replacement property. Many 1031 exchange experts also serve as qualified intermediaries—including the experts at 1031 National Services.

6. Close the Acquisition of Your Replacement Property

With your like-kind exchange open, it is time to close the acquisition of your replacement property. At a minimum, you must identify a replacement property within 45 days of closing the sale of your relinquished property, and you must close on the sale of your replacement property within 180 days (in most cases). When closing the acquisition of your replacement property, you will need to work with your 1031 exchange expert to ensure that the proceeds from your previous sale are appropriately applied at closing.

7. Work with Your Tax Advisor to Prepare Your Annual Returns

Finally, once the process is complete, you will need to work with your tax advisor to prepare your annual returns. It is important that you report your 1031 exchange properly to maintain compliance with the Internal Revenue Code and avoid unnecessary scrutiny from the IRS. An experienced tax advisor should be able to assist you, and if you need help finding an experienced tax advisor, your 1031 exchange expert may be able to provide a referral.

Speak with a 1031 Exchange Expert at 1031 National Services

Do you need to know more about the process of conducting a 1031 exchange? If so, we invite you to get in touch. To speak with a 1031 exchange expert at 1031 National Services, please call 888-872-1031 or request a free consultation online today.