The 1031 Exchange Process Step by Step
A 1031 exchange has seven steps from pre-sale planning to closing the replacement property. Each step has specific actions, specific deadlines, and specific people who need to be involved. Miss any of them and the exchange fails. This page walks through each step in the order it actually happens, with a focus on exchanges that end in a Delaware statutory trust.
Before the 1031 Clock Starts
The cleanest 1031 exchanges start before the relinquished property is even listed. The seven-step process below works in either order: you can engage with our team first and plan the entire exchange in advance, or you can come to us mid-flight (already sold, already in the 45-day window) and we move quickly. Either way, the steps below are the steps.
Two things to know up front.
- The clock starts at Day 0: Day 0 is the day your relinquished property closes. Everything before that is preparation. Everything after is on a deadline. Day 45 (identification) and Day 180 (closing) are statutory and inflexible.
- Several professionals work together: A 1031 exchange is not a solo activity. Your team typically includes our advisors, a qualified intermediary, your CPA, your attorney, and the title company on each closing. We coordinate.
The Seven Steps of a 1031 Exchange
The first three steps happen before the clock starts. The last four happen against the clock. That’s the easiest way to think about a 1031 exchange. There’s the work you do to prepare, and there’s the work you do under deadline. Both halves matter equally.
Pre-Sale Planning
WHEN THIS HAPPENS
Before the relinquished property is listed.
WHAT HAPPENS
You and our advisors sit down (in person or by video) and walk through the basics: what you’re selling, what your estimated gain looks like, what your debt situation is, what your replacement preferences are, and what your timeline allows. We’ll work with your CPA to confirm the gain estimate and the deferral target. We’ll also help you identify a qualified intermediary if you don’t already have one.
WHY IT MATTERS
Every successful 1031 we’ve seen started here. The exchanges that fail or partially fail almost always failed because pre-sale planning didn’t happen. If you’re three weeks from listing the relinquished property and haven’t talked to a 1031 advisor yet, schedule a call this week.
Engage the Qualified Intermediary
WHEN THIS HAPPENS
Before the relinquished property closes. Always before.
WHAT HAPPENS
The qualified intermediary (QI) is a specialized third party that holds the sale proceeds between the relinquished sale and the replacement closing. The QI is engaged with a written exchange agreement before the relinquished property closes. If the QI isn’t engaged in time and you receive proceeds directly, even briefly, the exchange is disqualified and the entire gain is taxable in the year of sale.
WHY IT MATTERS
This is the single most common way 1031 exchanges fail. A seller assumes “we’ll handle the QI at closing” and the closing happens before the agreement is signed. The IRS does not provide flexibility here. The QI must be engaged before closing, full stop.
Sell the relinquished property (Day 0)
WHEN THIS HAPPENS
Day 0. The clock starts.
WHAT HAPPENS
The closing happens like any other real estate closing, with one critical difference: at closing, the sale proceeds wire directly to the QI’s escrow account, not to you or your bank. You do not touch the cash. The deed transfers to the buyer, the QI receives the proceeds, and from this moment forward you have 45 calendar days to identify replacement property and 180 calendar days to close on it.
WHY IT MATTERS
The wire instructions for closing day need to be set up in advance with the title company. The settlement statement needs to reflect the QI as the recipient of the proceeds. These details get coordinated in the final week before closing. If the title company has never handled a 1031 before, our team coordinates with them directly to make sure the wire goes the right place.
Identify replacement property within 45 days
WHEN THIS HAPPENS
Day 1 through Day 45 after the relinquished sale closes.
WHAT HAPPENS
Within 45 calendar days of Day 0, you must identify replacement property in writing, signed, and delivered to the QI. You can identify replacement property under one of three IRS identification rules:
- Three-Property Rule: identify up to three properties of any value.
- 200% Rule: identify any number of properties as long as their combined fair market value does not exceed 200% of the relinquished property’s value.
- 95% Rule: identify more than the 200% threshold, but actually close on at least 95% of the identified value.
DST 1031 investors often use the 200% rule to identify multiple DSTs and a direct property as a backup. The identification is final once delivered to the QI. After Day 45, the list cannot be changed.
WHY IT MATTERS
Day 45 is statutory. Falling on a weekend, holiday, or after a natural disaster doesn’t extend it (except in specific IRS-declared disaster relief situations). Most failed exchanges that don’t fail at the QI stage fail here. Our advisors send identification reminders well in advance.
Subscribe to the DST (or finalize the direct purchase)
WHEN THIS HAPPENS
Typically Day 30 through Day 90 for DSTs, or Day 60 through Day 150 for direct property.
WHAT HAPPENS FOR DSTS
DST subscription is the fastest part of any 1031 exchange. The Delaware statutory trust is already capitalized, the property is already acquired, and the offering documents are already prepared. You sign the Private Placement Memorandum, the subscription agreement, and the purchaser questionnaire (which confirms accredited investor status). Your QI wires the funds to the trust. The transaction can typically close in days.
WHAT HAPPENS FOR DIRECT PROPERTY
Direct replacement runs through a normal real estate transaction: contract negotiation, due diligence, financing approval, title work, and closing. This typically takes 30 to 60 days from contract acceptance, which is why direct replacement under the 45-day rule is so much harder than DST replacement.
Close on the replacement property by Day 180
WHEN THIS HAPPENS
On or before Day 180 (or the due date of your tax return, whichever comes first).
WHAT HAPPENS
The replacement closing transfers the property (or DST beneficial interest) to you, the QI wires the funds, and you receive title (or your beneficial interest is recorded in the trust’s records). Once the closing is complete, the like-kind exchange is operationally finished.
WHY IT MATTERS
If your tax return for the year of sale is due before Day 180, the earlier date applies. For most calendar-year taxpayers selling between January and June, this isn’t an issue (Day 180 falls before the tax return due date). For sales late in the year, it can be. Talk to your CPA about whether you need to file an extension to preserve the full 180-day window.
Report the exchange and start your basis tracking
WHEN THIS HAPPENS
With your tax return for the year of sale.
WHAT HAPPENS
File IRS Form 8824 with your tax return for the year the relinquished property was sold. Form 8824 reports the exchange, calculates any boot received, and establishes your carryover basis in the replacement property. Your CPA prepares this from the documentation our team and your QI provided during the exchange.
Keep all of the following indefinitely: the exchange agreement, the identification letter, the DST subscription documents (or replacement closing statement), Form 8824, and any K-1 forms you receive on the DST. The carryover basis tracks forward through every future 1031 exchange you do.
WHY IT MATTERS
The deferred gain doesn’t disappear. It tracks with you through every subsequent exchange. When you eventually sell without a 1031 (or your heirs receive a stepped-up basis at your death), the cumulative deferred gain comes due. Accurate basis records throughout the process protect you and your heirs from being unable to substantiate the calculation later.
What Our Team Does Throughout the Process
Most steps above involve coordination across multiple parties. Our advisors run that coordination so you can focus on the decision points rather than the operational work.
- Pre-sale planning: We work with you and your CPA to model the gain, the deferral target, and the debt-replacement requirement before you list.
- QI and closing coordination: We introduce you to a qualified intermediary if you need one, and coordinate with the title company on both sides to make sure proceeds wire to the right place at the right time.
- Replacement property review and subscription: We walk through current DST options, model the debt match, review the PPM with you, and handle the subscription paperwork.
- Day 45 and Day 180 reminders: We track the deadlines and check in well in advance of each one.
- Tax-filing handoff: After replacement closes, we provide your CPA with the documentation needed for Form 8824 and basis tracking.
Exchanges fail when one of these coordination points doesn’t happen, not because the rules are too complicated.
