A 1031 exchange is a sequence, not a form you file. Six stages, two deadlines that start on the same day, and one rule that quietly ends the whole thing if you break it.
The Easy1031 Exchange DeskReviewed September 3, 202612 min read
The mechanism
1
You sell
Relinquished property · Day 0
2
Intermediary holds
Qualified intermediary · Up to 180 days
3
You buy
Replacement property · By Day 180
The money never reaches you. Any receipt of the proceeds, however brief, ends the exchange.
The short answer
You sell an investment property, but the proceeds go to a qualified intermediary rather than to you. Within 45 days you name the replacement property in writing; within 180 days you close on it using the money the intermediary held. Because you never took receipt of the funds, the IRS treats it as an exchange rather than a sale — and the capital gains tax is deferred instead of due.
Days to identify
45Days to identifyCalendar days from closing
Days to close
180Days to closeIncludes the 45 — they overlap
You may receive
$0You may receiveAny receipt ends the exchange
The IRS form
8824The IRS formFiled for the year of the sale
How a 1031 exchange works, in one paragraph
Section 1031 of the Internal Revenue Code says that if you exchange one investment property for another of like kind, you do not recognise the gain at the time of the swap. The practical problem is that almost nobody finds someone willing to trade properties directly. So the rules allow a delayed exchange: you sell to one party, buy from another, and a qualified intermediary sits in the middle holding the money so that the two transactions are treated as a single exchange rather than a sale followed by a purchase.
Everything else — the deadlines, the identification notice, the rules about who may hold the funds — exists to keep that fiction honest.
Why the mechanism works the way it does
Almost every rule in a 1031 exchange follows from one idea: you must never have the ability to touch the money. Not “must not spend it” — must not be able to reach it. The tax code calls this actual or constructive receipt, and it is the line between an exchange and a sale.
That single constraint explains the rest of the structure. It is why an independent intermediary has to hold the proceeds. It is why that intermediary cannot be you, your agent, or the CPA who has been advising you. It is why the funds wire directly from one closing table to the other and never pass through your account, or your attorney’s. And it is why an exchange has to be set up before the sale closes rather than after.
How a 1031 exchange works, step by step
What follows is the 1031 exchange process for a standard delayed exchange — the structure used in roughly nine out of ten cases, where you sell first and buy afterwards. Each step below says who does it and when it has to happen.
1
Step 1: Engage a qualified intermediary before closing
Who
You and your qualified intermediary
When
Ideally when the property goes under contract; at the latest, days before closing
A 1031 exchange has to be set up before you sell, not after. The exchange agreement, the assignment of your sale contract, and the notice to the other party all have to be in place at or before closing.
This is the single most common way an exchange is lost. Once the closing agent wires the proceeds to you — or to your attorney's trust account on your behalf — you have received the money, and no intermediary can undo that.
2
Step 2: Sell the relinquished property
Who
You, the buyer, the closing agent, your intermediary
When
Day 0
Your sale closes normally from the buyer's point of view. The difference is invisible to them: the intermediary has been assigned into your side of the contract, and the closing agent sends the net proceeds to the intermediary instead of to you.
The date title transfers is Day 0. Both the 45-day and the 180-day clocks start here, and they run at the same time.
3
Step 3: Identify replacement property within 45 days
Who
You, delivering to your intermediary
When
By Day 45, midnight
Identification is a formal step, not a conversation. It has to be in writing, signed by you, unambiguous about which property you mean — a street address or legal description — and delivered to the intermediary by midnight on Day 45.
You may revoke and re-identify as often as you like inside the window. Once it closes, the list is fixed: you can only acquire property that appears on it.
4
Step 4: Go under contract on the replacement property
Who
You, the seller, your lender, your intermediary
When
Usually between Day 20 and Day 120
You negotiate the purchase yourself. The intermediary is then assigned into your side of that contract, mirroring what happened on the sale, so it can pay for the property with the funds it is holding.
Financing works normally. Most lenders have seen exchanges before; tell them early that a qualified intermediary is involved, because the vesting and the source of the down payment will look unusual on the file otherwise.
5
Step 5: Close within 180 days
Who
You, the seller, the closing agent, your intermediary
When
By Day 180, or your tax filing deadline if sooner
At the replacement closing the intermediary wires the exchange funds to the closing agent, the deed is recorded in your name, and the exchange is complete.
The 180-day window has a second, less-known limit: it also ends on the due date of your tax return for the year of the sale. A sale that closes in November can therefore have well under 180 days unless you file for an extension.
6
Step 6: Report the exchange on Form 8824
Who
You and your CPA
When
With that year's tax return
The exchange is reported on IRS Form 8824 with the return for the year of the sale — not the year the replacement closed, if those differ.
Your adjusted basis carries over into the replacement property rather than resetting to the purchase price. That lower basis is what preserves the deferred gain, and it also means your depreciation schedule continues from where it was rather than starting fresh.
Who does what
An exchange has more moving parts than a normal sale, and the most common source of trouble is someone doing a job that isn’t theirs — usually a closing agent trying to be helpful by sending you the proceeds.
Roles in a 1031 exchange and their limits
Role
What they do
What they cannot do
You (the exchanger)
Decide what to sell and buy, negotiate both contracts, sign the identification notice, and file Form 8824.
You may never take actual or constructive receipt of the sale proceeds.
Qualified intermediary
Holds the proceeds between closings, prepares the exchange documents, and wires funds to the replacement closing.
Cannot be you, your agent, or anyone who has been your employee, attorney, CPA, broker or investment banker in the prior two years.
Closing / title agent
Wires the net proceeds to the intermediary at the sale, and receives them back at the purchase.
Should not disburse any proceeds to you, even briefly.
Your CPA
Confirms the numbers work, computes boot if any, and files Form 8824.
Cannot act as your qualified intermediary if they have advised you in the last two years.
Lender
Underwrites the replacement purchase, allowing for the intermediary in title and the source of funds.
Should be told about the exchange early — vesting and down-payment sourcing look unusual otherwise.
The two clocks in the 1031 exchange process
Both deadlines begin the day title to your relinquished property transfers. They run concurrently, which is the detail most people get wrong: the 180-day period does not begin when the 45-day period ends. By the time your identification window closes, a quarter of your buying window has already gone.
Day 0Day 45Day 180
Identification window45 days
45
Completion window180 days
180
Both bars start at the same point. The 180 days include the 45 — they are not consecutive. Once identification closes you have 135 days left to negotiate, finance and close a property purchase, not 180.
The 45-day and 180-day deadlines, drawn to scale from the closing date of the relinquished property.
Calendar days, not business days. Weekends and federal holidays count, and a deadline landing on a Sunday is still that Sunday. The only recognised extension comes from an IRS disaster relief notice. The timeline page covers the identification rules in detail.
How much has to be reinvested
To defer the whole gain, three things all have to be true:
The replacement property costs as much or more than the one you sold.
All of the net proceeds held by the intermediary go into the purchase.
Any debt that was paid off is replaced — with new borrowing, or with cash out of your own pocket.
Miss any of the three and the shortfall becomes boot, taxable up to the amount of your gain. Boot comes in two flavours: cash boot, which is proceeds you keep, and mortgage boot, which is the amount by which your debt went down without you making up the difference.
You are not being asked to avoid spending the money. You are being asked never to be able to reach it.
The rule everything else follows from
What property qualifies
Real property held for investment or for productive use in a trade or business. Since the 2017 Tax Cuts and Jobs Act, only real property qualifies — personal property exchanges were removed from Section 1031 entirely.
For real estate, “like-kind” is read very broadly. It does not mean similar. Raw land can be exchanged for an apartment building, a retail strip for a warehouse, a rental condo for a share in a Delaware Statutory Trust. What matters is that both are US real property held for investment or business use.
Fractional interests such as DSTs and tenant-in-common interests
Does not qualify
Your primary residence
Property held mainly for resale, such as a fix-and-flip
Stocks, bonds, partnership interests and notes
Any personal property, since the 2017 Act
Real property located outside the United States
What an exchange costs
Most qualified intermediaries charge $800 to $1,500 for a standard forward exchange, and often add wire fees, per-property fees and rush fees on top. Reverse and improvement exchanges typically start around $4,000 because they need a separate holding entity.
There is a second cost that never appears on an invoice. Your proceeds sit with the intermediary for up to 180 days, and that balance earns interest. At most intermediaries the intermediary keeps it — which, on a seven-figure exchange, is usually a far larger number than the fee. It is worth asking any intermediary you speak to what happens to that interest, and getting the answer in writing.
If you remember one thing
A 1031 exchange is not a tax form you file after the fact. It is a structure you have to put in place before your sale closes — and the one thing it cannot survive is you touching the money.
Everything else — the intermediary, the deadlines, the identification notice, the wiring instructions — exists to protect that single fact. Get it right and the rest is administration. Get it wrong and there is no exchange to administer.
Common questions
How does a 1031 exchange work, in simple terms?
You sell an investment property, but instead of the money coming to you it goes to a qualified intermediary who holds it. Within 45 days you name the property you intend to buy, and within 180 days you close on it using the money the intermediary held. Because you never took receipt of the proceeds, the IRS treats it as an exchange rather than a sale, and the capital gains tax is deferred instead of due.
How does a 1031 exchange work step by step?
Six steps. One, sign an exchange agreement with a qualified intermediary before your sale closes. Two, sell the relinquished property, with the net proceeds wiring to the intermediary rather than to you. Three, identify replacement property in signed writing within 45 days. Four, go under contract and assign that contract to the intermediary. Five, close within 180 days using the funds it holds. Six, report the exchange on IRS Form 8824 with that year's return.
Why can't I just hold the money myself between the two closings?
Because taking actual or constructive receipt of the proceeds ends the exchange. Section 1031 defers tax on an exchange of property, not on a sale followed by a purchase. The qualified intermediary exists specifically so that you never control the funds — that is the whole mechanism, and it is why the intermediary cannot be you, your agent, or your recent advisor.
When does the 45-day clock actually start?
On the day title to your relinquished property transfers — not when you sign the contract, and not when the funds clear. That day is Day 0. The 45-day identification deadline and the 180-day closing deadline both start then and run concurrently, so by the time identification closes, a quarter of your purchase window is already gone.
What happens if I miss the 45-day or 180-day deadline?
The exchange fails and the transaction is treated as an ordinary sale. The intermediary returns your funds and the full gain becomes taxable for the year of the sale — federal capital gains, depreciation recapture, net investment income tax if it applies, and state tax. The deadlines are statutory and cannot be extended except under an IRS disaster relief notice.
Do I have to reinvest all of the money?
To defer the entire gain, yes. You need to buy replacement property of equal or greater value, reinvest all of the net proceeds, and replace any debt that was paid off — either with new debt or with additional cash of your own. Anything you keep is called boot and is taxable up to the amount of your gain. A partial exchange is allowed; you simply pay tax on the shortfall.
How much does a 1031 exchange cost?
Most qualified intermediaries charge $800 to $1,500 for a standard forward exchange, plus wire fees and per-property fees. Reverse and improvement exchanges typically start around $4,000 because they need a separate holding entity. Some intermediaries, including Easy1031, charge nothing for a standard forward exchange and earn from the interest on the funds instead.
Can I do a 1031 exchange on my house?
Not on your primary residence. Section 1031 applies to real property held for investment or for productive use in a trade or business. A rental you own does qualify. A home you live in does not, though it has its own exclusion under Section 121, and a property that has been both at different times can get complicated — that is a conversation for your CPA.
How many properties can I buy with one exchange?
As many as you can identify under one of the three identification rules. The three-property rule lets you name up to three of any value. The 200% rule lets you name any number so long as their combined value stays under twice what you sold. The 95% rule lets you name any number at any value provided you actually close on at least 95% of the value identified.
Boot, basis, EATs and the rest of the vocabulary, defined in plain language.
Ready to start your exchange?
Easy1031 charges $0 to set up a standard forward exchange — no setup fee, no wire fees, no per-property fees — and shares the interest your funds earn while they are held.
Easy1031 publishes this guide. It is a qualified intermediary, so it has a commercial interest in you starting an exchange — worth weighing, and worth comparing against other intermediaries before you commit.
