A 1031 exchange allows you to sell an investment or rental property and defer capital gains taxes by purchasing a like-kind replacement property. You have 45 days to identify potential replacement properties and 180 days total to close on one. A qualified intermediary must hold your proceeds during the exchange. Personal residences do not qualify unless converted to rental use first.
The 1031 Exchange Process
Sell your investment property and have the proceeds sent directly to a qualified intermediary (QI). The QI holds the funds while you identify replacement properties. You must close on the replacement property within the exchange period. The QI transfers the funds to the seller of the replacement property. You never take constructive receipt of the money.
Timeline: 45 and 180 Days
Day 1 is the closing date of your sold property. You have 45 calendar days to identify up to three potential replacement properties (or more under certain valuation rules). You have 180 calendar days total to close on the replacement property. These deadlines are strict and cannot be extended, even for weekends or holidays.
Why You Need a Qualified Intermediary
The IRS requires a qualified intermediary to facilitate the exchange. You cannot handle the funds yourself. The QI prepares the exchange documents, holds the proceeds, and ensures the transaction meets IRS requirements. Choose an experienced, bonded intermediary with a strong reputation.
Common Mistakes to Avoid
Missing the 45-day identification deadline is the most common mistake. Do not touch the proceeds. Buy equal or greater value and reinvest all equity to defer all gain. Do not use a property you intend to occupy personally. Work with a tax advisor experienced in 1031 exchanges from the beginning.