--- title: 1031 Exchange Process - How To Complete In 10 Easy Steps description: The 1031 exchange process does not have to be difficult. Here is how you can complete a 1031 exchange in 10 easy steps. image: https://www.realized1031.com/hubfs/Images/Page/Photography/Featured/How-You-Complete-a-1031-Exchange-in-10-Easy-Steps.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # How You Complete a 1031 Exchange in 10 Easy Steps Posted May 24, 2020 ![1031 Exchange Process cover photo](https://www.realized1031.com/hs-fs/hubfs/Images/Page/Photography/Featured/How-You-Complete-a-1031-Exchange-in-10-Easy-Steps.jpg?width=631&height=420&name=How-You-Complete-a-1031-Exchange-in-10-Easy-Steps.jpg) A 1031 “like-kind” exchange is widely used by real estate investors to create and preserve wealth. In simple terms, Internal Revenue Code §1031 allows real estate investors to defer capital gains taxes on the profits from selling an investment property, provided the sale proceeds are “exchanged” (reinvested) into another [“like-kind” property](https://www.realized1031.com/glossary/like-kind-property) (investment real estate). Below is the process involved in completing a 1031 “like-kind” exchange. Let’s do this. 1. ** Seek Advice** ** **Before committing to a 1031 exchange, consult with a tax advisor to determine if a 1031 exchange is right for you, and more importantly is a good match with your *overall* investment goals. 1. **Know Your Numbers** To be as well informed as possible, know your existing tax and debt basis, the anticipated closing date for the relinquished property (property being sold), and [federal and state capital gains tax rates](https://www.realized1031.com/capital-gains-tax-rate). This is where a trusted tax advisor can be of service. 1. ** Choose a Qualified Intermediary** The [Qualified Intermediary](https://www.realized1031.com/glossary/qualified-intermediary) is a vital part of orchestrating a proper tax-deferred exchange and is required by the IRS to successfully complete the exchange. Choose one who is reputable, experienced, and has a long track record of completing successful exchanges. 1. ** Include a Cooperation Clause in Your Sales Agreement** When you complete the sales agreement contract of the relinquished property (the property being sold), it is very important to include language, or an addendum, in the contract that lists your intent to use the property as part of an exchange. This is usually easy to do, and does not require additional costs or delays. 1. ** Let your Qualified Intermediary Handle Proceeds** After closing the sale on your former property, the closing agent will wire funds into an exchange account established by the qualified intermediary. To defer taxes, you are not allowed to touch sale proceeds from the relinquished property—because if you do, the entire transaction may become taxable. This is why the qualified intermediary handles all of the funds. 1. ** Be Mindful of the 45-Day Identification Period ** After closing on the sale of your former property, you have [45 days](https://www.realized1031.com/glossary/45-day-exchange-period) to formally identify—in writing—a replacement property. The IRS has created a few 45-day rules for identifying a replacement property, but the most common method is the [“Three Property” rule](https://www.realized1031.com/glossary/three-property-rule). It states that you may formally identify up to three different properties as long as one of them is ultimately used as the replacement property. You can provide written identification of the possible replacement properties through your qualified intermediary, or through a third party like a settlement agent or escrow holder if needed. It’s important to note that the IRS is very strict on this deadline and no extensions are granted. 1. **Don’t Forget the 180-Day Deadline** After closing on your former property, you have [180 days](https://www.realized1031.com/glossary/180-day-exchange-period) to close on a replacement one, and no more. The 45-day identification period and the 180-day exchange period run concurrently. Simply stated, both deadline clocks start on the closing date of the relinquished property (property sold). 1. ** Close on Your Replacement Property** Next, you must complete the purchase of the replacement property using the proceeds from the [relinquished property](https://www.realized1031.com/glossary/relinquished-property). It is important to include a cooperation clause in the purchase agreement, similar to the one in the relinquished property’s contract. Shortly before closing, the qualified intermediary will transfer proceeds from the relinquished property to the closing agent at the title company and complete the exchange. Note there are additional requirements regarding the purchase price and mortgage balance required on the replacement property.   1. ** Report the Exchange** When you file a tax return for the year in which you completed an exchange, you need to report it on IRS Form 8824, Like-Kind Exchange. Click [here](https://www.irs.gov/pub/irs-access/f8824_accessible.pdf) to get a link to the form. Make sure your tax preparer receives copies of all sale and purchase documents and duly notes transaction dates. 1. **Enjoy!** Now you can sit back and enjoy the benefits of deferring 100% of your capital gains tax by completing 1031 Tax Exchange! 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In simple terms, Internal Revenue Code §1031 allows real estate investors to defer capital gains taxes on the profits from selling an investment property, provided the sale proceeds are “exchanged” (reinvested) into another “like-kind” property (investment real estate). Below is the process involved in completing a 1031 “like-kind” exchange. Let’s do this. Seek Advice Before committing to a 1031 exchange, consult with a tax advisor to determine if a 1031 exchange is right for you, and more importantly is a good match with your overall investment goals. Know Your Numbers To be as well informed as possible, know your existing tax and debt basis, the anticipated closing date for the relinquished property (property being sold), and federal and state capital gains tax rates. This is where a trusted tax advisor can be of service. Choose a Qualified Intermediary The Qualified Intermediary is a vital part of orchestrating a proper tax-deferred exchange and is required by the IRS to successfully complete the exchange. Choose one who is reputable, experienced, and has a long track record of completing successful exchanges. Include a Cooperation Clause in Your Sales Agreement When you complete the sales agreement contract of the relinquished property (the property being sold), it is very important to include language, or an addendum, in the contract that lists your intent to use the property as part of an exchange. This is usually easy to do, and does not require additional costs or delays. Let your Qualified Intermediary Handle Proceeds After closing the sale on your former property, the closing agent will wire funds into an exchange account established by the qualified intermediary. To defer taxes, you are not allowed to touch sale proceeds from the relinquished property—because if you do, the entire transaction may become taxable. This is why the qualified intermediary handles all of the funds. Be Mindful of the 45-Day Identification Period After closing on the sale of your former property, you have 45 days to formally identify—in writing—a replacement property. The IRS has created a few 45-day rules for identifying a replacement property, but the most common method is the “Three Property” rule. It states that you may formally identify up to three different properties as long as one of them is ultimately used as the replacement property. You can provide written identification of the possible replacement properties through your qualified intermediary, or through a third party like a settlement agent or escrow holder if needed. It’s important to note that the IRS is very strict on this deadline and no extensions are granted. Don’t Forget the 180-Day Deadline After closing on your former property, you have 180 days to close on a replacement one, and no more. The 45-day identification period and the 180-day exchange period run concurrently. Simply stated, both deadline clocks start on the closing date of the relinquished property (property sold). Close on Your Replacement Property Next, you must complete the purchase of the replacement property using the proceeds from the relinquished property. It is important to include a cooperation clause in the purchase agreement, similar to the one in the relinquished property’s contract. Shortly before closing, the qualified intermediary will transfer proceeds from the relinquished property to the closing agent at the title company and complete the exchange. Note there are additional requirements regarding the purchase price and mortgage balance required on the replacement property. Report the Exchange When you file a tax return for the year in which you completed an exchange, you need to report it on IRS Form 8824, Like-Kind Exchange. Click here to get a link to the form. Make sure your tax preparer receives copies of all sale and purchase documents and duly notes transaction dates. Enjoy! Now you can sit back and enjoy the benefits of deferring 100% of your capital gains tax by completing 1031 Tax Exchange!", "articleSection" : [ "1031 Exchange" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2020-12-02T20:12:27+0000", "datePublished" : "2020-12-02T20:12:27+0000", "description" : "The 1031 exchange process does not have to be difficult. 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