A Practical Guide to the 1031 Tax Deferred Exchange
From the Executive Exchange Company, Inc.

What is a 1031 Exchange?

 The 1031 Exchange is a legal process where an investor can defer any federal and state income taxes due on the gain from the sale of an investment property. This enables investors to transfer all of their equity into a replacement property without tax consequences.

Critical Points to Remember

Exchange timeline:
Phase 1: From the sale & close of escrow on your first property to when you identify your replacement - 45 days.
Phase 2: From the time you identify the replacement to the close of property escrow on the replacement property - 135 days.

  • Consult your tax advisor or attorney to determine if a 1031 tax deferred exchange satisfies your investment strategy.
  • The exchangor has 45 days to identify replacement property. This period begins at the close of escrow of the first property (Phase 1).
  • The exchangor has an additional 135 days from the end of the identification period for a total of 180 days from the close of the first escrow to close on the replacement property.
(Please note if you close your Phase 1 portion of your exchange after October 15, you will be unable to use the full 180 days allowed unless you file for a tax extension.)

What Properties Qualify

When determining what property qualifies for a 1031 exchange the exchangor must be concerned with the concept of "Like Kind". "Like Kind" means property held for business, trade or investment.

This means if you hold real property as an investment you can exchange it for any other type of real property as long as it is held as an investment.

Who Benefits?

Small, Medium, and Large owners of investment property.

Why Do An Exchange?

Allows you to diversify your real estate holdings from:
  • Large properties to small properties
  • Small properties to large properties
  • One type of real estate investment to another type of real estate investment

Eight Easy Steps To a Successful 1031 Tax Deferred Exchange

  1. Consult with your tax advisor to evaluate whether a 1031 tax deferred exchange meets your investment objectives and goals.
  2. List the investment property with a licensed broker/agent.
  3. The exchangor enters into a contract with the buyer for the sale/exchange of the investment property.
  4. Open your escrow account for the investment property and coordinate the escrow with an Exchange Accommodator. The Exchange Accommodator will prepare the exchange agreement, all the necessary amendments and assignments and coordinate with the escrow holder.
  5. The exchangor must identify all replacement property(s) within 45 days from the date of the close of escrow of the investment property.
  6. Select and enter into contract on the replacement property. After closing on the investment property, the exchangor has 180 days to acquire the replacement property.
  7. Close the replacement property escrow. The Exchange Accommodator will prepare the Phase 2 exchange documents and coordinate with the escrow holder. This completes your delayed exchange.
  8. Consult your realtor about accommodators. There are several in the area an some are better than others. I can give you some names.