Important Information – Ensuring a successful exchange process is the endeavor of 1031 Exchange Services. Before you begin the exchange process, be sure to consult tax or financial advisor to insure that a 1031 exchange is right investment choice. As TIME is the decisive factor in the 1031 exchange process; we encourage our Exchangers to search for Replacement properties as soon as possible. DO NOT allow the replacement property to close without an exchange being structured. However, If it becomes so, a Reverse Exchange can always be structured.

Step 1. Market the relinquished property for sale.Call 1031 Exchange Services to sell the property.

Step 2. While writing the sale/purchase agreements include the 1031 Cooperation Clause. This clause establishes the taxpayer's intention to exchange and puts the parties of the exchange on notice. Make sure the escrow officer/closing agent contacts the Qualified Intermediary to order the exchange documents.

Step 3. Enter into a 1031 exchange agreement with the Qualified Intermediary. Here the Qualified Intermediary is named as principal in the sale of the relinquished property and the subsequent purchase of your replacement property. The 1031 Exchange Agreement must meet the IRS requirements, especially pertaining to the proceeds. Along with said agreement, an amendment to escrow is signed which names the Qualified Intermediary as ‘Seller’. Normally the deed is prepared for recording from the taxpayer to the true buyer. This is called direct deeding It is not necessary to have the replacement property identified at this point of time.

Step 4. The relinquished escrow closes. The closing statement reflects that the Qualified Intermediary was the seller, and the proceeds go to the Qualified Intermediary. The funds should then be placed in a separate, completely segregated money market account to ensure liquidity and safety. The closing date of the relinquished property escrow is day ‘ZERO’ of the exchange, and that’s when the exchange clock begins to tick. Written identification of the replacement property must be sent within 45 days and the identified replacement property must be acquired by the taxpayer within 180 days.

Step 5. The taxpayer sends written identification of the address or legal description of the replacement property to the Qualified Intermediary, on or before the 45th day of the exchange. This document needs to be signed by everyone who has signed the initial exchange agreement. This document can either be faxed, hand delivered, or mailed to the Qualified Intermediary, the seller of the replacement property or his agent, or to a totally unrelated attorney. It is however advisable to send it by a certified mail with a return receipt requested. By adopting this procedure, there is a proof of receipt from a government agency.

Step 6. The Taxpayer enters into an agreement to purchase ‘Replacement Property’. Once again include the Cooperation Clause in the sales agreement – “Seller is aware that the buyer's intention is to complete a 1031 Exchange through this transaction and hereby agrees to cooperate with buyer to accomplish same, at no additional cost or liability to Seller.” An amendment is signed naming the Qualified Intermediary as ‘Buyer’, but again the deeding is from the true seller to the taxpayer.

Step 7. When conditions are satisfied and escrow is prepared to close (certainly prior to the 180th day) as per the 1031 Exchange Agreement, the Qualified Intermediary forwards the exchange funds and growth proceeds to escrow, and the closing statement reflects the Qualified Intermediary as the buyer. A final accounting is sent by the Qualified Intermediary to the taxpayer, showing the funds coming in from one escrow, and going out to the other, all without constructive receipt by the taxpayer.

Step 8. Taxpayer files Form 8824 with the IRS when taxes are filed. The taxpayer also submits any such similar documents as the particular State may require.