1031 Exchange: Step By Step

Investors unfamiliar with 1031 Exchanges may envision the process as being in mida ng and difficult. In realty, it doesn’t have to be. In order to successfully complete an exchange, investors must simply follow the following basic steps.

1. Set up an Exchange Account

The 1031 Exchange account MUST be opened before the close of escrow on the property being sold. Wai ng un l the very last minute is not recommended, but Asset Ex-change Company (AEC) can open a ‘rush’ account if neces-sary. AEC will need a copy of the sale contract and the contact info. for the escrow officer to open the account.

2. Add 1031 Exchange Language

The appropriate 1031 language should be added to the sale contract reflec ng the sellers intent to exchange. The agent will usually add this language but AEC can provide a sample of such language if necessary.

3. Review and Execute the Exchange Agreement

The exchange agreement will be sent out for review prior to closing. Execu on of the exchange documents will take place at the closing table when all other closing documents are signed.

4. Locate Replacement Property

The IRS requires that poten al replacement property be iden fied on or before day 45 of the exchange and replace-ment property must be acquired on or before day 180 of the exchange.

5. Submit 45 Day Iden fica on Le  er

The iden fica on le er MUST be submi ed no later than day 45 of the exchange. All poten al replacement proper-

es must be iden fied in wri ng in an unambiguous manner.

6. Provide AEC with the Contract

Once in contract on replacement property, AEC will need to pre-pare the “Phase 2” 1031 Exchange documents. To do so, we will need a copy of the contract and the contact informa on for the escrow officer.

7. Request Funds for Deposits

Money for the ini al earnest money deposit can be made out of pocket or disbursed from the exchange account. If personal funds are used for the deposit, clients can be reimbursed thru escrow at the closing of the replacement property.

8. Execute Phase 2 Exchange Agreement

AEC will work with the replacement property escrow company to obtain all appropriate signatures for all exchange documenta on. Depending on the nature of the transac on, addi onal steps may need to take place. Asset Exchange Company will work closely with the client to ensure a smooth and successful transac on.

9. Report the Exchange

Repor ng the exchange will be done using Federal Form 8824 for the year your Relinquished Property sold. There is no equiva-lent state form, so preparing Form 8824 will be sufficient to re-port your exchange for both your State and Federal returns. The informa on you provide on Form 8824 will flow to your Federal Schedule D and the equivalent State form.

The subject ma  er in this brochure is intended as general informa on only and not intended as tax or legal advice. Please always consult with your tax or legal advisor for any specific tax or legal ma ers.

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