How to Do a 1031 Exchange: Step by Step

Most exchange failures happen because of poor preparation, not because the process is complicated. This guide covers what to do at each stage — with real timelines, decision points, and the mistakes that actually blow up exchanges.

Step 1: Decide whether exchanging makes sense (8-12 weeks before sale)

Not every property sale warrants a 1031 exchange. Before you commit to the deadlines and constraints, make the decision with real numbers.

Calculate your actual tax exposure. Use a 1031 tax savings calculator to estimate your full liability: federal capital gains, depreciation recapture, NIIT, and state tax. If the total is $25,000, the exchange constraints might not be worth it. If it's $125,000, they almost certainly are.

Ask the three qualifying questions:

1. Do I want to stay in real estate? (If no, consider simply paying the tax and moving on.)
2. Can I realistically find replacement property within 45 days? (If unsure, build your pipeline before you list.)
3. Am I willing to reinvest all my equity and replace my debt? (If no, consider a partial exchange and accept some taxable boot.) Make the call. If you want to stay in real estate, the tax is significant, and you can identify property in 45 days — exchange. If any of those isn't true, consider alternatives: partial exchange, installment sale, or simply paying the tax.

Step 2: Assemble your team (6-8 weeks before sale)

A 1031 exchange isn't a solo operation. You need a coordinated team in place before you list the property.

Qualified intermediary (QI). The QI holds your sale proceeds, manages the exchange paperwork, and releases funds when you close on replacement property. Start vetting QIs 6-8 weeks before your expected sale. See our QI selection checklist for what to look for.

Tax advisor (CPA or tax attorney). You need someone who understands your specific basis, depreciation history, entity structure, and state tax situation. If you're in a high-tax state like California or New York, your CPA should understand the state-specific reporting requirements.

Real estate broker(s). You'll need a listing agent for the sell side and possibly a buyer's agent for replacement property. If you're exchanging into a different market, engage that buyer's agent now — don't wait until after closing.

Title and escrow company. They need to know this is a 1031 exchange so proceeds are routed correctly. Alert them when you open escrow, not at closing.

Optional: 1031 exchange advisor. For complex exchanges or investors considering DSTs, an independent exchange advisor can help with replacement property analysis and sponsor evaluation.

Step 3: Build your replacement property pipeline (before you sell)

This is the step that separates successful exchanges from failed ones. Do not wait until after the sale to start looking for replacement property.

The 45-day identification window is for confirming your targets — not for starting your search from scratch. Investors who begin looking on Day 1 often end up panic-buying suboptimal properties or failing the exchange entirely.

For direct property exchanges:

• Start browsing target markets 2-3 months before you plan to sell

• Talk to buyer's agents in your target markets and explain your timeline

• Build a list of 5-10 realistic candidates — properties that fit your criteria and are actually likely to be available

• Tour properties if possible; if not, request virtual tours and full financial packages

• By the time you sell, you should have 2-3 strong candidates you'd be comfortable putting on your identification list For passive/DST exchanges:

• Start requesting offering materials from DST sponsors or advisors 4-6 weeks before sale

• Review PPMs, sponsor track records, and fee structures

• Having 2-3 vetted DST options ready before Day 0 gives you enormous flexibility

• Remember: DSTs can serve as backup even if you're primarily pursuing direct property

Step 4: Sell the relinquished property (Day 0)

List, market, negotiate, and close on your property through normal channels. The exchange mechanics don't change how you sell — they change where the money goes.

Before listing:

• Inform your listing agent this will be a 1031 exchange

• Have your QI agreement signed and ready (must be executed before closing)

• Confirm your QI's wire instructions During escrow:

• Provide the exchange agreement and QI information to the title/escrow company

• Confirm that all sale proceeds will be wired directly to your QI

• Your name should not appear on the disbursement — not even briefly At closing (Day 0):

• The sale records and your 45-day and 180-day clocks start immediately

• Your QI receives the proceeds directly from escrow

• You receive nothing — that's the point Critical: If you touch the money at any point, even briefly, you have "constructive receipt" and the exchange fails. The QI-to-QI wire must be clean.

Step 5: Identify replacement property (Days 1-45)

You have 45 calendar days to formally identify potential replacement properties in writing to your QI. This deadline is absolute — no extensions, no exceptions, not even for weekends or holidays.

What counts as proper identification:

• In writing (email is fine, but confirm receipt)
• Delivered to your QI before 11:59 PM on Day 45
• Unambiguous property descriptions (street address is sufficient for most properties; legal descriptions for land) Which rule to use: Most investors use the 3-Property Rule: identify up to three properties of any value. You don't have to buy all three — you just need to close on at least one by Day 180.

The strategic identification:

• Slot 1: Your primary target — the property you most want to buy
• Slot 2: Your backup — a solid alternative if #1 falls through
• Slot 3: A fast-closing option — typically a DST that can close in days if needed This third slot is insurance. If your direct deals collapse on Day 120, a pre-vetted DST can rescue the exchange. Without it, you're betting everything on deals you don't fully control.

Step 6: Due diligence and negotiation (Days 1-180)

You've identified your targets. Now you need to get under contract and close due diligence on at least one of them.

For direct property acquisitions:

• Submit offers and negotiate purchase agreements

• Order inspections, appraisals, environmental assessments

• Complete title search and review

• Secure financing (lender must know this is a 1031 exchange)

• Negotiate repairs or credits as needed

• Track your 180-day deadline throughout For DST acquisitions:

• Complete and submit subscription documents

• Wire your investment amount through your QI

• DSTs typically close within 3-10 business days of completed subscription Managing timeline risk: If your primary deal looks shaky — financing delays, seller issues, inspection problems — start activating your backup identification. Don't wait until Day 170 to discover your deal won't close.

Step 7: Close on replacement property (by Day 180)

Your QI releases the exchange funds to complete the purchase. The replacement property must be closed and recorded by Day 180.

For full deferral, you must:

• Acquire property equal to or greater than your sale price
• Replace all debt (mortgage on replacement ≥ mortgage on relinquished, or add equivalent cash)
• Use all exchange proceeds The tax-year trap: If your Day 180 falls after April 15 of the year following your sale, and you haven't filed an extension, your exchange period is cut short. File Form 4868 (automatic 6-month extension) by April 15 to protect your full 180 days. There's no cost to file an extension.

At closing:

• Your QI wires exchange funds to escrow/title
• You may add personal funds for any amount above exchange proceeds
• The deed records in your name (or your entity's name)
• You now own replacement property with a carryover basis

Step 8: Report the exchange on your tax return

File IRS Form 8824 with your federal return for the year of the sale (not the year of replacement purchase, if different).

What Form 8824 reports:

• Description of both properties

• Dates of sale and purchase

• Value of properties exchanged

• Boot received (if any)

• Gain deferred and gain recognized What your CPA calculates:

• Adjusted basis in the replacement property

• Depreciation schedule going forward

• Any recognized gain from boot State filing: If you sold property in California, you must also file Form 3840 with your California return. Other states have varying requirements.

Step 9: Hold, manage, and eventually exchange again

Your replacement property carries the adjusted basis from the relinquished property — plus any additional cash you invested, minus any boot received. Your new depreciation schedule starts from this carryover basis.

Going forward:

• Hold the replacement property for business or investment use
• When you're ready for the next transition, you can 1031 exchange again
• Successive exchanges continue deferring the gain
• At death, heirs receive a stepped-up basis — potentially eliminating the deferred gain entirely