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What Are the Typical Steps In a 1031 Exchange?

Posted by Chris Peterson | Sep 09, 2022 | 0 Comments

When a real estate investor contacts our Qualified Intermediaries to inquire about the 1031 Exchange process, one of the first things they generally want to know is, “what steps will I need to take to complete an exchange?”

The good news is that the process is basically the same for everyone across the United States, and an investor can expect the following events to unfold during a typical transaction:

  1. The investor enters into a contract to sell their current property, which is called the “Relinquished Property.” The contract will look the same as any standard real estate contract, with the addition of a “Cooperation Clause” stating that the buyer will sign anything at closing necessary for the seller to do their 1031 Exchange.

  2. Closing will occur on the relinquished property. Again, this will proceed like any standard closing, with just a few extra documents to sign. Only instead of the seller walking from the table with a check, the proceeds of the sale will be wired to the 1031 Exchange Agent who will hold the funds on the client's behalf until the new property (called the “Replacement Property”) is purchased.
  1. The investor from this point has 180 days to purchase their Replacement Property. In the first 45 of those days, they must identify that property and list it on their identification sheet.

  2. The investor will then enter into a contract to buy the Replacement Property. The steps will look similar to the above—there will be a few extra forms and language that ensures cooperation on both sides.

  3. At the closing of the Replacement Property, the Exchange Agent wires the money they are holding from the Relinquished Property to the title company to cover costs. Once the property is settled, the deed goes directly to the buyer and the exchange is complete.

  4. The investor will report the 1031 Exchange on his or her tax return once all of the properties have been bought and the exchange completed.

Sound Complicated? Don't Worry!

Here's the great news. To complete a 1031 Exchange, the IRS requires that you use a Qualified Intermediary or Exchange Agent whose job is to walk you through all of the steps above. Don't worry if the process seems hard or complicated; your Exchange Agent will be with you every step of the way to ensure that you do not miss a signature, deadline, or important requirement under the IRS rules.

If you have more specific questions about the 1031 Exchange process or you'd like help getting started with one of your own properties, our Qualified Intermediaries are here to offer guidance and support. Simply contact us at (888) 508-1901 to schedule a consultation.

About the Author

Chris Peterson

Chris Peterson is the owner of Peterson Law Group. He practices primarily in the areas of wills, trusts and estate planning; probate and trust administration; elder law; and business law. Chris is also the owner of Brazos 1031 Exchange Company.

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