How a 1031 exchange works
A plain-English walk-through of a delayed (forward) exchange — what happens, when it happens, and what you need to do at each stage.
The exchange timeline
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1As soon as you go under contract
Contact us and complete intake
Send us your signed purchase and sale agreement and your closing agent’s contact information. You complete a short Exchange Information Form telling us who holds title, how the property has been used, and the details of the sale. We open your exchange file and assign an exchange number.
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2At least 3 business days before your sale closes
Sign the exchange documents
You sign the Exchange Agreement — the written agreement required by Treasury Regulation §1.1031(k)-1(g)(4) — and assign your rights under the sale contract to Bridgepoint Exchange. Your buyer acknowledges the assignment. We deliver our wire instructions and closing instructions to your closing agent. E-signature is available for everything.
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3Closing day — Day 0
Your relinquished property closes
Title passes directly from you to your buyer. The closing agent wires the net proceeds directly to our exchange escrow account, where they are recorded under your exchange number. We confirm receipt with you by phone. Your 45-day identification period and 180-day exchange period both begin today.
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4By midnight on Day 45
Identify your replacement property
You deliver a signed, written identification describing each potential replacement property (street address or legal description). You may change your identification any time up to Day 45, but not after. If you close on a replacement property within the 45 days, that property is treated as identified.
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5When you go under contract to buy
Assign the purchase contract
You assign your rights under the purchase contract to Bridgepoint Exchange and the seller acknowledges the assignment. If earnest money is needed from exchange funds, you sign a disbursement authorization and we wire it to the closing agent.
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6By midnight on Day 180
Your replacement property closes
With your signed authorization and a verbal confirmation call, we wire the exchange funds to the closing agent. Title passes directly from the seller to you. Any funds left over are returned to you after the exchange period ends (and are generally taxable).
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7Tax time
Report the exchange on Form 8824
You report the exchange on IRS Form 8824 with your federal return for the year your relinquished property closed. We provide a closing summary with the dates, amounts, and property descriptions your tax preparer will need.
Find your Day 45 and Day 180
Enter the date your sale closes (or closed). Deadlines are counted in calendar days and end at midnight on the day shown.
For planning only. Your 180-day period may end sooner if the due date of your tax return (including extensions) comes first. Confirm your dates with us and with your tax advisor.
You may identify replacement property under any one of these rules:
- Three-property rule: up to three properties, regardless of value.
- 200% rule: any number of properties, as long as their combined fair market value does not exceed 200% of the value of what you sold.
- 95% rule: any number and any value, if you actually acquire at least 95% of the total value identified.
Three things to reinvest
To defer all of your gain, the replacement side of the exchange generally must match or exceed the relinquished side in each of these ways. Anything you fall short by — cash you receive or debt you do not replace — is called “boot” and is generally taxable.
Equal or greater value
Buy replacement property worth at least as much as the property you sold (net of selling expenses).
All of the net equity
Reinvest every dollar of exchange proceeds. Any cash you take at either closing is taxable boot.
Replace the debt
Debt paid off on the sale must be replaced with new debt on the purchase — or offset with additional cash you bring to closing.
What qualifies
- Real property held for investment or for productive use in a trade or business — rental houses, apartments, commercial buildings, farmland, and vacant land all qualify.
- Real property for real property. Since 2018, only real estate qualifies; equipment, vehicles, and other personal property do not.
- Both properties must be located in the United States (or both outside it).
- The same taxpayer who sells must buy. If title to the relinquished property is held by an LLC, the same LLC generally must acquire the replacement property.
What generally does not qualify
- Your primary residence (though a home with a rental portion may partially qualify).
- Property held primarily for sale — flips and developer inventory.
- Partnership interests, stocks, notes, and other securities.
- A sale that has already closed and paid you the proceeds.
FAQ
Can I use my own attorney, CPA, or real estate agent as the intermediary?
No. Anyone who has acted as your employee, attorney, accountant, investment banker, or real estate agent or broker within the two years before the sale is a “disqualified person” and cannot serve as your Qualified Intermediary.
What if I cannot find a replacement property in time?
If you do not identify property by Day 45, or do not close on identified property by Day 180, the exchange fails and your funds are returned to you after the applicable period ends. The gain is then taxable in the ordinary way. There is no penalty beyond the tax itself.
Can I buy before I sell?
That is a “reverse” exchange, which requires an exchange accommodation titleholder to park one of the properties. It is more complex and more expensive than a forward exchange. Contact us to discuss whether it fits your situation.
Can I exchange one property for several, or several for one?
Yes. Multiple relinquished or replacement properties are common. The identification rules and the equal-or-greater-value test apply to the exchange as a whole.
Where is my money while it is held?
In our exchange escrow account at a federally insured U.S. bank. The account is held by LMH Group, LLC d/b/a Bridgepoint Exchange as escrow agent for its exchange clients, is kept separate from our operating funds, and also holds the exchange funds of our other clients. Your funds are recorded in a separate ledger under your name and exchange number, are held only in bank deposit accounts (never securities), and are released only with your signed written authorization plus a verbal confirmation call. Exchange funds do not earn interest for you; interest on the account is retained by Bridgepoint Exchange as part of our compensation, as disclosed in your Fee Schedule and Exchange Account Disclosure.
How much does it cost?
A standard forward exchange with one relinquished and one replacement property is a flat $890, paid on your closing statement. Additional properties and outgoing wire fees are listed on our written fee schedule, which you receive and acknowledge before you sign.
Does Kentucky (or my state) tax the exchange?
Most states in our service area follow the federal treatment of a Section 1031 exchange, but state rules and withholding requirements vary. Please confirm the state tax treatment of your transaction with your tax advisor.