looking to do our dirst 1031 exchange

[Khemaro N.]

Hello All,

We’re going to sell our triple decker in Rhode Island this year and would like to do a 1031 exchange. Can someone explain how the process work step by step. Thank you very much

[Anthony Thompson]

@Khemaro N. it looks like Bigger Pockets already has a good 1031 exchange section, What are 1031 exchanges and how do they work?

But the simple version is, before you sell the first property you contact a 1031 exchange company (sometimes called a qualified intermediary), ideally one that I see local to you and has been in business for a while, since you’ll be trusting them with a lot of your money. A referral from another investor who used them successfully would be good if possible.

(You can’t use your existing accountant or attorney since they are supposed to be independent and not presumed to be under your control since the real purpose of the 1031 exchange agent/intermediary is to keep you from touching your money during the exchange.)

Before you finish the sale of the first property (the “relinquished property”) you let the closing agent know you’re doing a 1031 exchange and give them the contact info for your exchange intermediary, then the closing agent sends the money you would normally have gotten to the exchange intermediary instead.

At that point you have 45 days from that first closing to both identify up to 3 potential new properties, one of which (the “replacement property”) you have 180 days to actually close on. The 180 days also starts from the first closing by the way, not the end of the 45 days.

Then when you are getting ready to close on the new property you let the closing agent know that your funds will be coming in from a 1031 exchange and give them the contact info for your exchange intermediary. Of course, you’d have to bring to closing and extra funds if your exchange funds don’t cover what you need for the new property, and if your exchange funds are too much and you actually get money back at the second closing you have to pay taxes on just that money you get back (called “boot”).

That’s the basic, simple version. There are a lot of finer details (e.g., there are more complicated identification methods than “identify three and close on one”) and some tricker variations on vanilla 1031 exchanges (e.g., reverse exchanges, construction exchanges etc.) but the general idea is you take your money from property A and move it to property B and use a special company (the exchange intermediary) to make sure you don’t touch the money in between, and you don’t have to pay taxes from the sale of property A because all the money went directly to property B.

Hope this helps!