1031 Exchange Do's and Don'ts

DO NOT miss your 45-day identification and 180-day exchange deadlines, as this will disqualify the entire exchange. Reputable Qualified Intermediaries will not act on back-dated or late identifications.

DO advanced planning for the exchange. Talk to your accountant, attorney, broker, financial planner, lender and Qualified Intermediary. Read the IRS form 8824 before you exchange. Reading it clarifies what you have learned.

DO NOT try doing a 1031 Exchange yourself using your CPA or attorney to hold title or funds. IRS regulation requires a Qualified Intermediary to properly complete an exchange. Regulations under IRC Section 1031 disqualify any attorney, broker, accountant or real estate agent who provides routine service to the taxpayer from holding exchange funds. Call us to get a name of a Qualified Intermediary that operates in your area.

DO attempt to sell before you purchase. Occasionally exchangers find the ideal replacement property before a buyer is found for the relinquished property. If this situation occurs, a “reverse” exchange (buying before selling) may be required. Exchangers should be aware that reverse exchanges are considered a more aggressive exchange variation, which can result in higher transaction expenses.

DO NOT dissolve partnerships or change the manner of holding title during the exchange. A change in the Exchanger’s legal property may jeopardize the exchange.

DO identify the maximum number of properties. It doesn't cost anything to identify properties. Real property certainties can become disasters with a surprise survey, environmental report and botched closings.

DO NOT go to settlement unless your Qualified Intermediary's document is at settlement.

DO reinvest all exchange proceeds because you pay tax on proceeds that are not reinvested.

DO NOT file your income taxes for the year in which you do your exchange until you complete your exchange. If you do you could lose the benefits of the exchange.

DO acquire property with equal or greater debt because unless the debt reduction is replaced with cash, you pay tax on the debt reduction and you have no funds from the exchange with which to pay the tax.

DO NOT buy a real estate mutual fund or an REIT (Real Estate Investment Trust). Only real "like kind" property qualifies as the replacement property.

DO purchase your replacement property in the U.S. or U.S. Virgin Islands. Foreign investment property does not qualify.

DO NOT reinvest the proceeds in property you already own.

Typical exchange addendum language for sales contracts:

“Buyer hereby acknowledges that it is the intent of the Seller to effect an IRS Section 1031 tax-deferred exchange which will not delay the closing or cause additional expenses to the Buyer. The Seller’s rights under this agreement may be assigned to a Qualified Intermediary, named by the Seller, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller and the Qualified Intermediary in a manner necessary to complete the Exchange.