A 1031 exchange, also known as a “like-kind exchange,” is a tax strategy that allows real estate investors to defer paying capital gains taxes on the sale of a property by reinvesting the proceeds into a new “like-kind” property. This type of transaction can be a great way to grow your real estate portfolio and maximize your return on investment. In this blog post, we’ll explore the steps involved in a 1031 exchange real estate transaction.

1. Identify the Property You Want to Sell: The first step in a 1031 exchange is to identify the property you want to sell. This property must be used for business or investment purposes and must be held for more than one year.
2. Identify the Replacement Property: Once you have identified the property you want to sell, you’ll need to identify the replacement property or properties you wish to acquire. This can be done by working with a qualified intermediary (QI) or a real estate broker who specializes in 1031 exchanges.
3. Execute an Exchange Agreement: Once you have identified the replacement property, you’ll need to execute an exchange agreement with the QI. This document lays out the terms of the exchange, including the deadlines for identifying and acquiring the replacement property.
4. Close on the Sale of the Relinquished Property: After the exchange agreement is executed, you’ll need to close on the sale of the relinquished property. The proceeds from the sale must be held by the QI until they are used to purchase the replacement property.
5. Identify the Replacement Property within 45 days: The IRS requires that the replacement property be identified within 45 days from the date of the sale of the relinquished property. The QI will provide you with a written identification of the replacement property.
6. Close on the Purchase of the Replacement Property: After identifying the replacement property, you’ll need to close on the purchase within 180 days from the date of sale of the relinquished property. The proceeds from the sale of the relinquished property will be used to purchase the replacement property.
7. File Form 8824: After the closing of the replacement property, you’ll need to file Form 8824 with the IRS to report the exchange. This form must be filed by the due date of your tax return for the year in which the exchange took place.
8. Hold the Replacement Property: To complete a 1031 exchange, you must hold the replacement property for at least two years from the date of the sale of the relinquished property.

A 1031 exchange can be a great way to defer paying capital gains taxes and grow your real estate portfolio. It’s important to work with a qualified intermediary, who will guide you through the process and ensure that all the deadlines and requirements are met. By following these steps and meeting the IRS requirements, you can successfully complete a 1031 exchange and reap the benefits of this tax-deferral strategy.

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Ted Stratman – Managing Partner

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