Steps to a Basic 1031 Exchange

Step 1. Retain the services of Qualified Intermediary.

Step 2. Enter into your Purchase/Sales Agreement (contract). If possible, include the Cooperation Clause in the sales agreement. "Buyer is aware that the seller's intention is to complete a 1031 Exchange through this transaction and hereby agrees to cooperate with seller to accomplish same, at no additional cost or liability to buyer." Make sure your escrow officer/closing agent contacts the Qualified Intermediary to order the exchange documents.

Step 3. Enter into an Exchange Agreement with your Qualified Intermediary, in which the Qualified Intermediary is named as principal in the sale of your relinquished property and the subsequent purchase of your replacement property. The 1031 Exchange Agreement must meet with IRS Requirements, especially pertaining to the proceeds. Along with said agreement, an amendment to escrow is signed which so names the Qualified Intermediary as seller. Normally the deed is still prepared for recording from the taxpayer to the true buyer. This is called direct deeding.

Step 4. The relinquished escrow closes, and the closing statement reflects that the Qualified Intermediary as the seller (ie: 1031 Discounted Exchange Services, Inc FBO "exchangor's legal name"). The proceeds then go to your Qualified Intermediary's bank into a holding account specifically for your funds. Funds are not co-mingles. The closing date of the relinquished property is the beginning of your 45 day Identification Period. Written identification of the address of the replacement property must be sent within 45 days and the identified replacement property must be acquired by the taxpayer by the 180th day.

Step 5. The taxpayer sends written identification of the address or legal description of the replacement property to the Qualified Intermediary, on or before Day 45 of the exchange. It must be signed by everyone who signed the exchange agreement, and it may be faxed, hand delivered, or mailed either to the Qualified Intermediary, the seller of the replacement property or his agent, or to a totally unrelated attorney. Send it via certified mail, return receipt requested. You will then have proof of receipt from a government agency.

Step 6. Taxpayer enters into an agreement to purchase replacement property, again including the Cooperation Clause as stated above. An amendment is signed naming the Qualified Intermediary as buyer, but again the deeding is from the true seller to the taxpayer.

Step 7. When conditions are satisfied and escrow is prepared to close and certainly prior to the 180th day, per the Exchange Agreement, the Qualified Intermediary forwards the exchange funds to escrow. The closing statement reflects the Qualified Intermediary as the buyer (ie: 1031 Discounted Exchange Services, Inc FBO "exchangor's legal name"). A final accounting is sent by the Qualified Intermediary to the taxpayer, showing the funds coming in from one escrow, and going out to the other, all without constructive receipt by the taxpayer.

Step 8. Taxpayer files form 8824 with the IRS when taxes are filed, and whatever similar document your particular state requires.

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