The 1031 Exchange Process Taken Step by Step

1. You will need to set up an exchange account with an authorized 1031 exchange firm. The 1031 account has to be opened before the close of escrow on the property being sold. It can be done in a rush, but it is best to have this process planned in advance with the escrow company.

2. Write up the 1031 Exchange terminology in the sales contract or escrow instructions. The appropriate 1031 language should be added to the sales contract or escrow instructions for the property being sold. The exchange company can draw up the proper language.

3. Execute the exchange agreement with the escrow company and exchange firm with the necessary signatures and documents.

4. A like kind replacement property must be located within forty five days. A like kind property essentially means real estate for real estate. This like kind property must be located within forty five days per the IRS requirement. Once the replacement property has been identified then the sale and escrow must be completed within six months.

5. Forward the 45 day identification letter. This identification letter has to be submitted within forty five days, and the replacement property must be located and identified. This is typically the most difficult part since you need to secure the acquisition of a second property within this six week period.

6. Forward funds for deposits, this can be done from a 1031 exchange account. There is typically a form from the 1031 exchange company. It is also possible for the deposit to come from your personal account with a reimbursement later.

7. Then you must complete the execution of the escrow documents from both parties on your replacement property, and fund the purchase with your prior closed escrow funds. If the replacement property requires a loan, or it is an income property then other steps maybe needed. Thus identifying an experienced 1031 firm will assist in more complicated exchanges. Also additional funds may be needed if the replacement property has higher value then the prior sold property. Again the 1031 exchange firm can assist with these additional steps.