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How to Defer Capital Gains with a 1031 Exchange
By Priya Raman
Five steps, two deadlines, and one intermediary you cannot skip.
Five steps, two deadlines, and one intermediary you cannot skip.
Say your sale closes on a Tuesday and you still have not called an intermediary. That is already too late, because the paperwork has to exist before the closing, not after. A 1031 exchange only defers your gain if you complete five specific steps in the right order, starting well before you sign anything.
The qualified intermediary (QI) must be in place before you close on your sale. If you receive the proceeds first, the exchange is disqualified. The QI holds the funds and wires them to your replacement property's seller.
Your QI receives the net proceeds from closing. From this date, your 45-day and 180-day clocks start simultaneously.
You must identify in writing the properties you intend to buy. Most exchanges use the Three Property Rule (up to three properties, any value) or the 200% Rule (any number of properties, combined value under 200% of the sale price).
The 180-day window runs from your sale closing date. You must close on one of your identified properties before this deadline. No extensions are granted.
To defer all gain, reinvest all proceeds and carry at least as much mortgage on the replacement as you paid off on the sale. Any shortfall becomes taxable boot.
None of the above is legal or tax advice. It is a sequence, not a substitute for a qualified intermediary and a tax professional who know your specific deal.
It depends on which step. Missing the 45-day identification deadline or the 180-day closing deadline kills the deferral outright, no exceptions for busy schedules. Skipping the qualified intermediary requirement, even briefly receiving funds yourself, does the same. There is no partial-credit version of this process.
No. The qualified intermediary has to be in place, and the exchange agreement signed, before the relinquished property closes. If you have already received the sale proceeds directly, the exchange opportunity is gone for that transaction.
Not by law, but it helps. A qualified intermediary handles the mechanics, not legal advice, and cannot tell you whether your ownership structure or contract terms create a problem. An attorney or CPA who has actually done a few of these is worth the fee.
At minimum, a signed exchange agreement, an assignment of your rights in the sale contract to the intermediary, and notice of that assignment to the buyer. Your intermediary will provide the exact paperwork, but it all has to be signed before you sign the closing documents, not after.