Selling an investment property? Plan your 1031 exchange before closing.

A 1031 exchange has to be set up before your sale closes. Tell Leah where your sale stands, and she will walk you through what has to be in place, in what order, and who does what.

• Certified Exchange Specialist (CES)
  A designation of the Federation of Exchange Accommodators, earned by examination. Verify it in the FEA directory.
• 11+ years of 1031 exchange experience
  Standard, reverse and improvement exchanges.
• One person, start to finish
  Leah reads every request herself and stays your point of contact.
• Investors in all 50 states
  Based in Brooklyn, New York.

Who the call is for

• Owners preparing to sell a rental, commercial building, land or other real estate held for investment or business use, who plan to buy other investment real estate.
• Sellers already under contract who have just learned that the exchange must be in place before closing.
• Owners who want to buy first, before the current property sells. That is a reverse exchange, and it has to be arranged before the purchase.
• Owners who are still deciding. If you are weighing a sale against an exchange, the call is a good place to start. So is the page on selling a rental property.

A 1031 exchange does not cover your own home, or property held mainly for resale (26 U.S.C. §1031(a)).

What you'll talk through

• Your closing date. How much time there is, and what has to be signed before then.
• How the property is owned. In your name, an LLC or a partnership. The owner that sells is generally the one that has to buy.
• What you want to buy. Whether you have a replacement in mind, and how the 45-day and 180-day periods fit your plan.
• Which kind of exchange fits. Standard (sell first), reverse (buy first) or improvement (build on the replacement).
• How much you plan to reinvest. Cash you take out, or debt that is paid off and not replaced, is generally taxable "boot" (26 U.S.C. §1031(b) and (d); Treas. Reg. §1.1031(d)-2).
• Who needs to be told. Your closing attorney or title company, your broker and your CPA.

The call is general education about how an exchange works for a sale like yours. Leah is not your CPA or attorney and does not give tax or legal advice.

What happens after you ask

1. Your request goes to Leah. She reads it herself.
2. Pick a time, if you like. Once the form is sent, you can choose a 15-minute slot on Leah's calendar, and she will call you then. Or simply wait: she replies by email to arrange a time. Sending the form alone does not book an appointment.
3. You talk. Bring your closing date and your questions.
4. If an exchange fits, you receive the exchange documents to review with your attorney before anything is signed.

There is no obligation at any step.

If your closing date is close

The exchange agreement has to be signed, and the closing agent instructed, before the sale closes. If all the sale proceeds are paid to you, or you can draw on them, the transaction is treated as a sale, even if you buy another property afterwards. Receiving part of them is taxable to that extent (Treas. Reg. §1.1031(k)-1(f)).

So if you are under contract, say so in the form and add your closing date. If your sale has already closed, choose "Already closed": Leah will tell you plainly where you stand.

The exchange in brief

1. Before closing. You sign an exchange agreement with a qualified intermediary. Your sale contract is assigned to it, all parties are notified in writing, and the closing agent sends the proceeds there, not to you.
2. Day 45. By the end of the 45th day after your sale closes, you identify possible replacement properties in a signed written notice.
3. Day 180. You receive the replacement property by the earlier of the 180th day after your sale closes or the due date, including extensions, of your tax return for the year of the sale (26 U.S.C. §1031(a)(3)).
4. At tax time. Your CPA reports the exchange on Form 8824.

These periods have no routine extensions. They can be postponed only in narrow cases, chiefly IRS relief for a federally declared disaster. This is a summary: your dates and your facts decide how the rules apply. See the timeline and the rules for more detail.

A 1031 exchange defers tax on the gain. It does not eliminate it: your basis carries over into the new property (26 U.S.C. §1031(d)).

Leah's role, and who holds your money

Leah plans the exchange with you, keeps the deadlines in front of you, and coordinates the paperwork with your closing attorney or title company and your CPA.

The qualified intermediary is the company that signs the exchange agreement and holds your sale proceeds between the sale and the purchase. It is a company, not an individual. Before you sign, Leah confirms in writing which qualified intermediary will hold your funds, and gives you its account, bond and insurance documents. Ask for those documents from any intermediary you consider. See the questions to ask any qualified intermediary.

How Leah works with your advisers

If you don't have a CPA or attorney involved yet, that is worth settling before closing. Advisers can read how Leah works with brokers, CPAs and attorneys.

Frequently asked questions

When should I get in touch?

Before your sale closes, and earlier is easier: when you decide to sell, or when you list. If you are already under contract there is usually still time, but the exchange has to be in place before closing.

My sale already closed. Is it too late?

If all the proceeds were paid to you, or you had the right to draw on them, the regulations treat the transaction as a sale, and an exchange is generally no longer possible (Treas. Reg. §1.1031(k)-1(f)). If a qualified intermediary received them under an exchange agreement, your exchange is already under way and the 45-day and 180-day periods are running.

How long is the call?

15 minutes. After you send the form you can pick a time on Leah's calendar, and she calls you at the number you give. If you would rather not pick a time, she replies by email to arrange one.

Does Leah hold my sale proceeds?

No. A qualified intermediary, which is a company, holds them under the exchange agreement. Leah confirms in writing which one before you sign, and gives you its account, bond and insurance documents.

Do I need to have found the replacement property?

No. You have 45 days after closing to identify it in writing. Starting the search before you close makes those 45 days much easier.

Can I buy the new property before I sell?

Yes, through a reverse exchange. It has to be arranged before you buy. See reverse 1031 exchanges.

Will the call tell me how much tax I'd defer?

The amount depends on your basis, depreciation and other facts that your CPA works out. For a first estimate, try the 1031 exchange calculator or the capital gains calculator. They show results on your screen without asking for contact details.

Sources

• 26 U.S.C. §1031: the property that qualifies, the 45- and 180-day periods, boot and basis.
• Treas. Reg. §1.1031(k)-1: identification, receipt of proceeds and qualified intermediaries.
• Instructions for Form 8824: reporting, and the exchange period.
• Treas. Reg. §1.1031(d)-2: how debt that is paid off counts in an exchange.
• Rev. Proc. 2018-58: when exchange deadlines can be postponed.

Educational information, not tax or legal advice.