The exchange checklist

For a shorter version to print, with each step marked for you, your intermediary, your tax advisor, your attorney or your closing agent, see the 1031 exchange checklist.

Before listing

The groundwork for an exchange is laid before the relinquished property is ever put on the market.

1. Confirm held-for-investment status with the tax advisor. The property sold and the property bought must both be held for investment or business use; a primary residence or property held primarily for sale does not qualify.
2. Confirm who the taxpayer is and how title is held. The same taxpayer that sells the relinquished property generally must acquire the replacement property; see the guide to LLCs, partnerships and disregarded entities.
3. Estimate the gain and the tax at stake, using the exchange calculator and the depreciation recapture calculator as a starting point.
4. Decide whether debt on the relinquished property will be replaced on the purchase. Debt relief that is not replaced by new debt or additional cash is treated as boot; see the guide to boot.
5. Engage a qualified intermediary before the sale contract is signed, or at least well before closing. For an exchange through a qualified intermediary, the intermediary must be in place before title transfers.

At contract

Once the relinquished property is under contract, the paperwork that sets up the exchange begins.

1. Add an exchange cooperation clause to the sale contract, stating that the seller intends to complete a 1031 exchange and that the buyer will cooperate at no additional cost or liability to the buyer.
2. Provide the contract and title information to the qualified intermediary, so the exchange agreement and closing instructions can be prepared before the closing date arrives.
3. Complete a W-9 for the taxpayer for the qualified intermediary's file. If title is held by a single-member LLC, the owner's name and taxpayer identification number go on line 1 and the LLC's name on line 2.

Before the sale closes

These steps have to be finished before the relinquished property's closing, not arranged afterward.

1. Sign the exchange agreement and the assignment of the taxpayer's rights under the sale contract to the qualified intermediary.
2. Deliver a notice of assignment to the buyer before closing.
3. Send closing instructions to the closing agent directing net proceeds to the qualified intermediary under the qualified intermediary safe harbor, Treas. Reg. §1.1031(k)-1(g)(4).
4. Confirm the settlement statement shows proceeds paid to the qualified intermediary, not to the taxpayer.
5. Verify wire instructions by phone, using a number obtained independently rather than one received by email, before any funds move.
6. Decide in writing, before closing, about any cash the taxpayer will take out at closing rather than exchange.

Days 1-45

The identification window opens the day the relinquished property closes.

1. Continue the search for replacement property; ideally it is already under way before the sale closes, so day 1 begins with candidates already toured rather than a search starting from nothing.
2. Deliver a signed, written identification by midnight of day 45 to the recipient your exchange agreement names, usually the qualified intermediary (the regulation also allows the replacement property's seller or another non-disqualified party to the exchange). Use unambiguous identifiers, an address or a legal description, for each property listed.
3. Keep identified property within the three-property rule or the 200 percent rule; see the identification rules for how each limit is calculated.
4. Revoke and re-identify in writing, before day 45, if plans change. A revocation delivered after day 45 does not remove a property from the list.

Days 46-180

From here the work shifts to closing on identified property before the acquisition deadline.

1. Put identified replacement property under contract, again with an exchange cooperation clause.
2. Deliver an assignment and notice of assignment to the seller of the replacement property.
3. Coordinate with the replacement property's lender, if any, on timing and on the qualified intermediary's role at closing.
4. Have the qualified intermediary wire exchange funds directly to the closing.
5. Close by the earlier of day 180 or the tax-return due date for the year of sale, including extensions, or file an extension before that return is due; see the guide to the 45- and 180-day deadlines.

After closing

The exchange is not finished at the replacement closing; the accounting and the return still follow.

1. Obtain a final accounting from the qualified intermediary showing funds in and out of the exchange, along with any interest earned while the funds were held.
2. Keep all exchange documents; they establish the replacement property's basis for as long as it is owned, including through a later exchange.
3. File Form 8824 for a completed or partial exchange, with the return for the year the relinquished property was sold. If the exchange failed, your tax advisor reports the sale on the appropriate forms (for example Form 4797 or Form 6252).
4. Set up depreciation schedules for the replacement property based on its carryover basis and any additional basis, coordinated with the tax advisor preparing the return.
5. Calendar the two-year related-party holding period if a related party was involved in the sale or the purchase, and file Form 8824 for each of the two following years. A purchase from a related party through a qualified intermediary generally does not qualify if the related party is cashed out; see the guide to entities and related parties.

Documents in a typical file

Most of the items above generate a document that belongs in the exchange file, kept alongside the tax return for the year of sale and carried forward for as long as the replacement property is owned:

• Exchange agreement
• Assignments of contract rights
• Notices of assignment to the buyer and the seller
• Closing instructions
• Identification notice
• Settlement statements for both closings
• Final accounting from the qualified intermediary
• Form 8824

A complete file answers most questions a tax advisor or, on audit, the IRS will ask about how the exchange was carried out, without anyone having to reconstruct the sequence from memory years later.

Sources

• Internal Revenue Code §1031(a)(3) (45- and 180-day limits).
• Treas. Reg. §1.1031(k)-1 (deferred exchange requirements, identification, assignment, restrictions on exchange funds).
• IRS Form 8824 and instructions.