How a 1031 Exchange Works
A detailed walkthrough of the 1031 exchange process, from selling your current property to closing on your tax-deferred replacement investment.
The Exchange Timeline
Follow these four key steps to successfully complete your 1031 exchange and defer your capital gains taxes.
Sell Your Investment Property
List and sell your current investment property. Before closing, engage a Qualified Intermediary (QI) who will hold the sale proceeds in escrow. The QI must be in place before the sale closes — you cannot take possession of the funds at any point.
Identify Replacement Property
Within 45 calendar days of the sale, formally identify potential replacement properties in writing to your QI. You may identify up to three properties of any value (3-Property Rule), or more under the 200% or 95% rules. DST investments qualify as replacement property.
Perform Due Diligence
Review the Private Placement Memorandum (PPM), property financials, sponsor track record, and projected returns for each identified property. For DST investments, evaluate the underlying real estate, debt structure, and distribution history.
Close on Replacement Property
Complete the purchase of your replacement property within 180 calendar days of the original sale. Your QI transfers the exchange funds directly to the seller. Upon closing, your capital gains taxes are fully deferred.
Property Identification Rules
The IRS provides three methods for identifying replacement properties. You must follow at least one of these rules.
3-Property Rule
You may identify up to three potential replacement properties regardless of their total market value. This is the most commonly used identification rule and provides the most flexibility for most investors.
200% Rule
You may identify any number of replacement properties as long as their combined fair market value does not exceed 200% of the value of the relinquished property sold. Useful when considering multiple smaller investments.
95% Rule
You may identify any number of replacement properties of any value, but you must acquire at least 95% of the total value of all identified properties. This rule is rarely used due to its strict acquisition requirement.
Ready to Start Your Exchange?
Our team will guide you through every step of the process, from selling your property to closing on your replacement investment.