What is the Process for Purchasing a 1031 Exchange Property?

For property owners or a real estate investors looking for ways to exempt capital gain taxes on property sales, employing a 1031 exchange is by far the most effective solution. The 1031 tax-deferred exchange allows one property to be sold and another bought without paying any capital taxes. While considering applying the tax-exempting discussion of property held for business or investment, the investors must be aware of specific vital requirements to initiate the process. In the 1031 exchange process, it is necessary to ensure that the properties exchanged must be of similar or higher value and have the same characteristics. In this article we will cover the steps necessary to properly reinvest your real estate asset and retain as much capital gains as possible.

Rules to be Followed

Similar Property

1031 Exchanges are applicable for investment-level properties. One has to remember that vacation or holiday cottages, primary residences, etc., are not eligible for 1031 Exchanges. For investors considering exempting taxes on the sale of their real estate properties, the 1031 Exchange can be an excellent tool. Also referred to as like-kind property exchange can’t take place when investment properties in question are not equal or similar in their
functioning and kind. Under 1031 Exchange, personal and actual property include equipment, machinery, aircraft, boats, cars, artwork, intellectual properties, etc.

Specific Time Frame

An investor must complete the 1031 exchange process within a specific time. The yield from the sale of the property must be utilized to purchase another property of the same value. To be eligible for a 1031 Exchange, an investor must recognize the replacement property within 45 days of the property sale. In addition, the purchase of another property must be completely done within 180 days, as per the rules and regulations of the IRS. Maintaining a specific time or period is of utmost importance for successfully carrying out and completing the 1031 Exchange of Properties. In case the given time frame lapses, the investors have to start from the initial process once again.

Steps Involved

Finding an Intermediary

The first step involves hiring an experienced intermediary or an exchange facilitator who can help execute the 1031 Exchange process smoothly. The rules and policies are better understood because they are an expert in the field. As such, an experienced intermediary can carry out a seamless transaction. The responsibilities include:
● Work with a tax advisor, understand the rules, and set a timeline.
● Prepare, review, and carry out the 1031 Exchange documents.
● Handle transaction closings and ensure compliance with regulations.
● Handle the sale of the property and purchase a replacement property.
● Establish an escrow account until the completion of the process.

Recognize the Selling Property

Identifying the property to be sold is yet another step in the 1031 exchange process. The process is more straightforward in most cases, where two or three properties are involved. But investors with multiple properties must consider many factors to sell the property. The current market condition, the expiration of the lease, the holding period, the profit gained, etc., are some of the elements that come into consideration.

Recognizing the Purchasing Property

When the identified property is sold, the investor is time bound to purchase the new property. As per the IRS and 1031 Exchange rules, an investor is given 45 days to recognize a property they intend to buy. The replacement property must be described legally in an agreement with a specific street name, building name, address, etc., so that each replacement property (investors with multiple properties) can be identified.

Purchasing the New Property

After identifying a potential replacement property, the investor completes the purchasing process. Based on the transaction details, the exchange might be one-to-one or one-to-many. Irrespective of the property exchange, an investor gets 180 days to complete the replacement property purchase process. This is where an experienced intermediary can be of great help.

Informing the IRS

Once the new property purchase has been successfully executed, the final step involves informing the IRS about the transactions of 1031 Property Exchange. Details about the investment properties exchanged, the exchange time required, the market value of properties, involvement of any private property, etc., must be included in the documents submitted to the IRS about the property transaction. Because of extensive paperwork, an expert’s help is advantageous.


The 1031 exchange process involves a lot of paperwork and is also complicated. But, if done correctly with the help of a competent intermediary, the process can be seamless. The steps mentioned above must be followed to enjoy a profitable property sale and purchase a replacement one, deferring taxes.