Starting a 1031 exchange is simpler than most investors think — but timing is everything. You must engage a qualified intermediary before you close on the sale of your relinquished property. Once the funds are in your hands, the exchange is disqualified. Here is exactly how the process works, from first call to completed exchange.
Step 1: Contact Us Before You List
The best time to call us is before you list your property for sale. This gives us time to review your situation, advise on the best exchange structure, and prepare all the necessary documentation before your closing date. Many investors wait until they are under contract — that still works, but earlier is always better. The one rule that cannot be broken: you must engage a qualified intermediary before the closing on your relinquished property. Once the proceeds are in your hands, the exchange is disqualified under IRS rules.
Step 2: We Prepare Your Exchange Documents
Once you engage us as your qualified intermediary, we prepare the exchange agreement, assignment documents, and escrow instructions. These documents are signed before closing and direct the title company to send the proceeds directly to our qualified escrow account — never to you.
- Exchange agreement and QI designation
- Assignment of purchase and sale agreement
- Escrow instructions to the title company
- Identification notice template
- Replacement property acquisition documents
Step 3: Close on Your Relinquished Property
At closing, the title company follows the escrow instructions and wires the sale proceeds directly to our exchange account. You receive the closing documents and your exchange clock starts. From this date, you have exactly 45 calendar days to identify your replacement property and 180 calendar days to close on it. These deadlines are strict — there are no extensions except in federally declared disaster areas.
Step 4: Identify Your Replacement Property
Within 45 days of closing, you must submit a written identification notice to us naming your replacement property or properties. The IRS allows three identification methods: the Three-Property Rule (identify up to three properties regardless of value), the 200% Rule (identify any number of properties as long as the combined fair market value does not exceed 200% of the relinquished property's value), and the 95% Rule (identify any number of properties if you actually acquire 95% of the total identified value). Most investors use the Three-Property Rule.
- Three-Property Rule: up to 3 properties, any value
- 200% Rule: unlimited properties, total value under 200% of sale price
- 95% Rule: unlimited properties if 95% of total value is acquired
- Identification must be in writing and delivered to us by midnight of day 45
Step 5: Close on Your Replacement Property
Once you have identified your replacement property and have it under contract, we coordinate with the replacement property's title company to transfer the exchange funds at closing. To achieve full tax deferral, you must reinvest all of the net proceeds and acquire a replacement property of equal or greater value. Any proceeds not reinvested are treated as boot and are taxable. We review the closing statement before closing to ensure everything is structured correctly.
How to Start a 1031 Exchange: A Step-by-Step Guide
Steve walks through the complete process of starting a 1031 exchange — from the initial call to the final closing on the replacement property. Includes a checklist of what you need to have ready before you call.
Common Questions
What is the most common mistake investors make?
Waiting too long to contact a qualified intermediary. If you close on your property before engaging a QI, the exchange is disqualified and the full gain is taxable. Call us before you list.
Can I do a 1031 exchange on any investment property?
Yes, as long as the property is held for investment or productive use in a trade or business. Primary residences do not qualify. Vacation homes may qualify if they meet the IRS safe harbor requirements.
Do I have to buy a property in the same state?
No. You can sell in one state and buy in any other state. We facilitate exchanges nationwide.
What happens if I cannot find a replacement property in time?
If you cannot close on a replacement property within 180 days, the exchange fails and the gain becomes taxable. We recommend identifying backup properties early and working with an experienced real estate agent who understands exchange timelines.