How to Do a 1031 Exchange: Step by Step

This is a sequential execution guide. Each step covers what to do, what to have ready, and what goes wrong if you skip it. If you need background on what a 1031 exchange is or how the timeline works, start with our introductory guide or timeline overview.

Step 1: Decide whether an exchange makes financial sense

When to do this: 8-12 weeks before your anticipated sale.

Run the numbers first. Use a 1031 tax savings calculator to estimate your total liability: federal capital gains, depreciation recapture, net investment income tax, and state taxes. If the combined bill is under $20,000, the exchange constraints may not be worth it. If it is six figures, they almost certainly are.

Decision checklist:

• Do I want to stay invested in real estate?
• Can I realistically identify replacement property within 45 days?
• Am I willing to reinvest all my equity and replace my debt?

If the answer to any of these is no, consider a partial exchange, an installment sale, or simply paying the tax.

Step 2: Assemble your team

When to do this: 6-8 weeks before your anticipated sale.

See our QI selection checklist for what to look for in an intermediary.

Step 3: Build your replacement property pipeline

When to do this: Before you sell. This step separates successful exchanges from failed ones.

The 45-day identification window is for confirming targets, not starting a search from scratch. Investors who begin looking on Day 1 often panic-buy suboptimal properties or fail the exchange entirely.

For direct property purchases:

• Browse target markets 2-3 months before listing
• Engage buyer's agents and explain your exchange timeline
• Build a list of 5-10 realistic candidates
• Tour or request virtual tours and financial packages
• By closing day, have 2-3 strong candidates ready for your identification list

For DST or passive replacements:

• Request offering materials from DST sponsors 4-6 weeks before sale
• Review PPMs, sponsor track records, and fee structures
• Have 2-3 vetted DST options ready as backup even if pursuing direct property

Step 4: Sell the relinquished property (Day 0)

List, market, negotiate, and close through normal channels. The exchange mechanics change where the money goes, not how you sell.

Pre-listing documents:

• QI agreement signed and ready
• QI wire instructions confirmed with title/escrow company
• Listing agent informed this is a 1031 exchange
• Cooperation clause included in the purchase agreement

At closing:

• All proceeds wired directly from escrow to QI
• Your name does not appear on any disbursement
• 45-day and 180-day clocks start immediately

If you touch the money at any point, even briefly, constructive receipt occurs and the exchange fails.

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

You have exactly 45 calendar days. This deadline is absolute: no extensions for weekends, holidays, or market conditions (unless a specific IRS disaster relief notice applies).

Formal requirements:

• Written identification signed by you
• Delivered to your QI before 11:59 PM on Day 45
• Each property described by street address or legal description

Strategic allocation of your three identification slots:

• Slot 1: Primary target
• Slot 2: Strong backup
• Slot 3: Fast-closing safety net (typically a pre-vetted DST that can close in days)

That third slot is insurance. If your direct deals collapse on Day 120, a DST can rescue the exchange. Without it, you are betting everything on deals you do not fully control.

Submit your identification by Day 40. Delivery problems on the last day have killed exchanges.

Step 6: Conduct due diligence and negotiate (Days 1-180)

For direct acquisitions:

• Submit offers and negotiate purchase agreements
• Order inspections, appraisals, environmental assessments
• Complete title search
• Secure financing (lender must know this is a 1031 exchange)
• Track the 180-day deadline throughout

For DST acquisitions:

• Complete and submit subscription documents
• Wire investment through your QI
• DSTs typically close within 3-10 business days

If your primary deal looks shaky (financing delays, inspection problems, seller issues), activate your backup identification immediately. Do not wait until Day 170 to discover your deal will not close.

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

For full deferral, confirm all three conditions:

• Replacement property value >= sale price of relinquished property
• New debt >= old debt (or add equivalent cash)
• All exchange proceeds deployed

The tax-return trap: If Day 180 falls after April 15 of the following year and you have not filed an extension, your exchange period is cut short. File Form 4868 by April 15. There is no cost.

At closing:

• QI wires exchange funds to escrow/title
• You may add personal funds for any amount above exchange proceeds
• Deed records in your name or your entity's name

Step 8: Report the exchange on your tax return

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

Form 8824 reports:

• Description of both properties and dates
• Values exchanged, boot received (if any)
• Gain deferred and gain recognized
• Related party information (if applicable)

Your CPA calculates:

• Adjusted basis in the replacement property
• Depreciation schedule going forward
• Any recognized gain from boot

State filing: California requires Form 3840. Other states have varying requirements. Confirm with your CPA.

Step 9: Hold, manage, and plan the next move

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

• Hold the replacement property for business or investment use
• When ready for the next transition, exchange again; successive exchanges continue deferring the gain
• At death, heirs receive a stepped-up basis, potentially eliminating the deferred gain entirely