Real Estate Tax Calc
Before you list: engage the qualified intermediary
The most important step in the entire process happens before anything visible occurs in the transaction: engaging a qualified intermediary (QI). The QI must be signed up and the exchange agreement must be executed before the relinquished property closes. Not before you accept an offer. Not before you list it. Before it closes.
Why so early? Because the QI must be assigned your rights under the sale contract before the transaction completes. If the assignment hasn't happened before closing, you have sold the property directly—not as part of an exchange—and the funds have constructively been received by you. At that point, no exchange is possible.
In practice, most investors engage their QI as soon as they sign the sale contract with a buyer, or even when they are actively listing the property with the intent to exchange. The QI will review the contract, prepare the exchange agreement, provide an assignment addendum for the sale contract, and coordinate with the escrow/title company to ensure proceeds go to the QI at closing, not to you.
Pitfall to avoid: Don't use your attorney, CPA, or real estate agent as the QI—they are all "disqualified persons" under Treasury Regulation §1.1031(k)-1(k) because of their prior agency relationship with you.
Step 1 — Close on the relinquished property
At the closing of the relinquished property (the property you are selling), the title company or escrow officer wires all net sale proceeds directly to the QI's exchange account. The closing disclosure will show the QI (not you) as the recipient of the proceeds. You sign various exchange-related documents at closing, including a direction letter instructing proceeds to be sent to the QI.
The moment the relinquished property closes is Day 0—the starting point for both the 45-day identification period and the 180-day exchange period. Write down this date immediately; your attorney, CPA, and QI should all confirm it.
Pitfall to avoid: Do not accept any check, wire, or cash from the closing, even as a temporary hold or "just until the QI account is set up." Any actual or constructive receipt of the proceeds ends the exchange.
Step 2 — The 45-day identification period
From Day 0 (the relinquished property closing), you have exactly 45 calendar days—not business days—to submit a written identification of your intended replacement properties. This is one of the hardest parts of the process because it is an absolute deadline with no flexibility.
The identification must be in writing, signed by you, and delivered to the QI (or the seller of the replacement property) no later than midnight of Day 45. Fax, email, overnight courier, and hand delivery all work—but verbal identification does not. Keep proof of delivery (a fax confirmation, email with timestamp, or delivery receipt).
The identification must be specific. Property addresses and legal descriptions qualify; descriptions like "a single-family home in Phoenix" do not. You may identify up to three properties under the most common rule (the 3-Property Rule), or more properties if you stay within the 200% Rule or plan to acquire 95% of identified properties.
Pitfall to avoid: Do not wait until Day 44 to start identifying. In competitive real estate markets, properties go under contract quickly. Have a list of 3–5 potential replacement properties ready before the relinquished property closes so you can identify promptly.
Step 3 — Going under contract on the replacement
Once you have identified your replacement property (or properties), you need to get one under contract and proceed to closing—all within the 180-day period. The QI must be assigned your rights under the replacement purchase contract (the "buy side" assignment) just as they were assigned your rights under the sale contract.
Inform your replacement property seller and their escrow/title company early that this is a 1031 exchange. Most sellers and title companies are familiar with exchanges, but some may require extra coordination. The closing disclosure should reflect the QI sending funds to the replacement property closing.
Pitfall to avoid: Do not let the real estate agent, title company, or escrow officer send exchange funds to you rather than directly to the replacement property closing. Also notify your lender early if you are financing the replacement—lender underwriting takes time and a 180-day deadline does not care about loan processing delays.
Step 4 — Close on the replacement property within 180 days
The replacement property must close—fully—no later than 180 days after the relinquished property closing, or by the due date of your tax return for the year of the relinquished property sale (including extensions), whichever is earlier. If you sold the relinquished property in October or November, the earlier-of-return-due-date rule may tighten your deadline. An investor who sells in November and files on April 15 without an extension has a replacement closing deadline of April 15—not the full 180 days from November.
At closing, the QI wires the exchange funds to the replacement property. Any remaining exchange funds not applied to the replacement are distributed back to you and become taxable. Add your own cash if the replacement property costs more than the exchange funds on hand.
Pitfall to avoid: Do not close on the replacement property in a rush if serious property or title issues exist. A hasty purchase just to meet the deadline can create long-term problems that outweigh the short-term tax savings. Build in at least a two-week buffer before the 180-day deadline.
Step 5 — File Form 8824 with your tax return
After the exchange completes, your QI provides a closing statement documenting the exchange—what was sold, what was purchased, the amounts, and the dates. Give this to your CPA along with the original purchase records and depreciation schedule for the relinquished property.
Your CPA files Form 8824 (Like-Kind Exchanges) with your federal income tax return for the year in which the relinquished property was sold. The form calculates the deferred gain and establishes the adjusted basis in the replacement property. The basis in the replacement property is the purchase price minus the deferred gain—lower than the actual price you paid, reflecting the tax obligation that follows the property.
Also update your depreciation schedule. The replacement property's depreciable basis starts from this lower adjusted basis, not from the purchase price. Using the full purchase price would overstate depreciation deductions and create a basis problem when the replacement property is eventually sold.
Timeline summary
Before relinquished property closing: Engage QI, sign exchange agreement, notify title company.
Day 0 — Relinquished property closes: Proceeds wire to QI. 45-day and 180-day clocks start.
Day 1–45: Identify replacement properties in writing; deliver to QI by Day 45 midnight.
Day 46–180: Negotiate, go under contract, and close on identified replacement. QI wires funds at replacement closing.
Tax season following the exchange year: CPA files Form 8824; update replacement property depreciation schedule.
Frequently asked questions
When should you contact a 1031 exchange qualified intermediary?
Contact a qualified intermediary (QI) as soon as you decide you want to do a 1031 exchange—ideally before listing the relinquished property, and certainly before it closes. The QI agreement must be signed and the QI must be assigned your rights under the sale contract before closing. Waiting until after closing means the exchange cannot happen.
Can you identify more than one replacement property?
Yes. You can identify up to three replacement properties of any value (the 3-Property Rule), or more properties under the 200% Rule (total FMV cannot exceed 200% of the relinquished property's FMV), or any number under the 95% Rule (if you acquire 95% of the identified FMV). Most investors use the 3-Property Rule for flexibility.
What happens if you miss the 45-day identification deadline?
If you fail to identify a replacement property in writing within 45 days of the relinquished property closing, the exchange fails entirely. All sale proceeds become taxable in the year of sale, and the qualified intermediary must return the exchange funds to you. There are no second chances or extensions for missing this deadline.
What happens after the 1031 exchange is complete?
After closing on the replacement property, your QI provides a closing statement. Your CPA uses this to complete Form 8824 for the year of the exchange. You also need a new depreciation schedule for the replacement property starting from its adjusted basis (purchase price minus deferred gain), not the full purchase price.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.