Get Started with a 1031 Exchange

A Reverse 1031 Exchange is a powerful tool for real estate investors who want to acquire a new property before selling their current one—allowing you to defer capital gains tax while securing the perfect replacement property. Although it’s a more complex process than a traditional exchange, following these five essential steps will keep things on track and compliant.

1. Connect with Your Real Estate Team Early

As soon as you begin considering a Reverse 1031 Exchange, reach out to your real estate agent, Qualified Intermediary (QI), title company, and tax advisor. Reverse exchanges require more coordination, so having the right team in place from the beginning ensures all documentation is handled properly and timelines are met.

2. Consult with Your Tax Advisor

Before committing to a reverse exchange strategy, schedule a meeting with your CPA or tax advisor. They can walk you through your potential capital gains liability, help calculate your financial benefit from the exchange, and ensure the process aligns with your overall investment goals.

3. Add the Right Language to Your Contracts

Make sure your real estate contracts include specific language indicating your intent to complete a 1031 exchange. A suggested clause is:

“Both the Seller and the Buyer agree to cooperate in a manner necessary to enable either party to qualify for an IRC Section 1031 tax-deferred exchange at no additional cost or liability. Either party’s rights and obligations may be assigned to a Qualified Intermediary to facilitate such exchange.”

Always verify with your legal or tax professional before including this clause.

4. Identify the Relinquished Property Within 45 Days

You must formally identify the property you plan to sell within 45 days of purchasing your replacement property. This identification must be made in writing and submitted to your Qualified Intermediary within that window to stay compliant with IRS rules.

5. Close the Sale of the Relinquished Property Within 180 Days

From the date the replacement property is purchased, you have 180 days to sell your existing property. Meeting this deadline is critical to preserve your tax-deferred status.