At RealWealth, we come across a lot of investors who don’t think much about doing a 1031 exchange until after they’ve sold their property and are in the 45-day crunch time window. While we can still help people in this situation find quality replacement properties and boost their cash flow, it’s generally better to decide to do an exchange ahead of time as it allows for proper planning and strategy. Below, we will outline the typical 1031 exchange timeline that real estate investors should follow to avoid paying capital gains tax. 

A Typical 1031 Exchange Timeline

Please note that this can differ from person to person. This is by no means a one-size-fits-all timeline.

Step 1: Decide you want to do a like-kind exchange

The first step on the typical 1031 exchange timeline is simple: decide to do a 1031 exchange. This is something to spend a bit of time pondering because, depending on your situation, it may not make sense to do a 1031 exchange. Perhaps you need or want the cash from your investment property and are okay with paying capital gains tax. Maybe you don’t have the energy to learn all the rules or just don’t want to deal with the hassle. 

However, the juice is worth the squeeze for many investors I’ve worked with. Imagine being able to double or even triple your monthly cash flow by selling one high-priced property in a bubble market for several cash-flowing properties in more affordable markets around the country, like Charlotte, Atlanta, or Jacksonville.

If this sounds like your situation, doing a 1031 exchange is definitely advantageous enough to warrant a discussion with your accountant. 

Step 2: Put your property on the market

You can put your property up for sale as usual, but make sure to talk to your agent about adding 1031 exchange lingo into the listing paperwork. Whoever buys your property will need to be willing to work on your timeline.

Step 3: Find a Qualified Intermediary

When looking for a Qualified Intermediary (QI), it’s important to look for someone with experience with the type of exchange you’d like to do (e.g., if you’re doing a reverse exchange, find a QI who knows this process backward and forward). Ideally, your QI has performed thousands of successful exchanges and has many positive client reviews. 

Here are a few ideas for how to find a great Qualified Intermediary: 

• Get a referral – ask an escrow officer, friends, or family. 
• Research online
  Check out client reviews on third-party sites
• Become a RealWealth member to get access to a list of Qualified Intermediaries frequently used by our members.

Step 4: Look for replacement properties

As I mentioned above, it’s better to have a strategy for finding replacement properties in place before you sell your property. Because as soon as you sell, the 45-day countdown begins. And this is not a lot of time to find high-quality properties that can cash flow. It’s definitely possible, but it’s more difficult. 

Sorry to include another self-promotion here, but finding cash-flowing replacement properties is one of our specialties. As a RealWealth member, you can schedule a complimentary 1031 strategy session with me or one of my colleagues. We are very familiar with the 1031 exchange timeline, having done it ourselves, and can connect you with the right resources and offer guidance.

Step 5: Negotiate & close on the sale of your relinquished property

The person who is buying your property must know you are doing a 1031 exchange. Ensure all the paperwork clearly states this because the buyer must comply with specific rules. Ask your agent or QI about this!

Work with your qualified intermediary, title company and attorney to handle the closing. Once the property has been officially relinquished, the funds from the transaction will be transferred to your Qualified Intermediary’s bank account for safekeeping.

Step 6: Identify your replacement properties within 45 days

You’ve closed, and the funds have been transferred into your QI’s bank account. Congrats! Now, it’s time to identify your replacement properties. You can identify up to three properties OR more than three properties if:

You close on 95% of them, OR the total value of all identified properties is less than 200% of the sales price of the property you relinquished.

Step 7: Choose your first-choice property and sign the contract

For most investors, one of the properties they identify stands out as their first choice. Getting that property under contract and opening escrow as soon as possible is important. Also, make sure that the seller knows about your 1031 exchange. 

You can also go under contract with your second, third and fourth choice properties. Just make sure to include contingency clauses so you can back out later if you can snag your first choice.

Note: It is possible to purchase more than one replacement property when doing a 1031 exchange. This scenario happens often when people sell $1 million+ properties in areas like the Bay Area or Manhattan for properties in more affordable markets like Baltimore or Detroit.

Step 8: Close on your replacement property

The final step of the 1031 exchange timeline is to close on your replacement property. Your Qualified Intermediary will send your money to the title company or attorney, and your property will close. This will allow you to defer paying capital gains tax until some point in the future when you choose to sell. If you ever choose to sell, which we hope you don’t. In an ideal world, you can avoid paying capital gains forever by continuing to exchange your replacement properties for new properties.

How RealWealth Can Help

At RealWealth, we connect our members with trusted 1031 exchange facilitators and property teams that sell professionally managed turnkey properties in the top markets nationwide. Membership is 100% free, yes, free. If you need support with your 1031 exchange transaction and finding replacement properties, join RealWealth today!