You know a 1031 exchange defers capital gains. Now here's exactly how to execute one — the steps, the exchange types, and how to finance the replacement property.
The 8-Step Process
Step 1: Hire a Qualified Intermediary. Do this before you list your property. The QI prepares the exchange agreement and holds your proceeds at closing. Fees run $800-$1,500.
Step 2: List and sell your property. Market it normally, but include in the contract: "Seller is doing a 1031 exchange" and "Buyer agrees to cooperate with QI."
Step 3: QI holds proceeds. At closing, sale proceeds go directly to the QI. You receive zero dollars. This is critical — if you touch the money, the exchange fails.
Step 4: Identify replacement properties (45 days). Send written identification to your QI with the property address and legal description. Be specific. "A 4-unit building in Los Angeles" doesn't count. You can name up to 3 properties.
Step 5: Open escrow on replacement. Make an offer and open escrow. Notify your QI.
Step 6: QI transfers funds. At closing on the replacement, your QI wires the exchange funds to escrow.
Step 7: Close and take title. You own the new property. All capital gains taxes are deferred.
Step 8: Report on your tax return. File IRS Form 8824 with your return to report the exchange.
Types of 1031 Exchanges
Delayed Exchange (Most Common)
Sell first, buy later within 180 days. This is the standard 1031. The steps above describe a delayed exchange.
Simultaneous Exchange
Close on both properties the same day. It's rare and hard to coordinate, but it works.
Reverse Exchange
Buy first, sell later. Use this when you've found the perfect replacement but haven't sold your current property yet.
The catch: You'll need significant cash upfront and an Exchange Accommodation Titleholder (EAT) to hold the property. Fees run $10K-$25K+. High complexity, but sometimes it's the only way to lock down the right deal.
Improvement Exchange (Build-to-Suit)
Use 1031 funds to build or improve the replacement property. Sell a rental for $800K, buy land for $400K, spend $400K building a new rental.
The catch: All improvements must be completed within the 180-day window. That's tight for any construction project.
Financing the Replacement Property
Cash Purchase
Simplest option. Use your 1031 proceeds plus additional cash if needed.
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New Loan
You can finance the replacement property. But watch the debt replacement rule: your new loan must be equal to or greater than the old loan. Otherwise, the shortfall counts as taxable boot.
Example that works:
- Old property loan: $300K
- New property loan: $400K
- No boot (you increased debt)
Example that triggers tax:
- Old property loan: $300K
- New property loan: $200K
- $100K boot (taxable)
Bridge Financing
If you're doing a reverse exchange — buying before selling — you may need a bridge loan to fund the purchase while waiting to close on the sale.
For more on investment property loan options, we've got a full breakdown.
FAQ
Can I 1031 from California to another state?
Yes. But if you're a CA resident, you still owe CA tax when you eventually sell — unless you move out of state first.
Can I 1031 a vacation home?
Only if it's rented most of the year and qualifies as investment property. The IRS scrutinizes these.
Can I do multiple 1031 exchanges in a row?
Yes. Investors chain them for decades. You can defer indefinitely until death, when heirs get a step-up in basis and the deferred taxes disappear.
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Can I 1031 into a DST?
Yes. Delaware Statutory Trusts qualify as replacement properties. Good option for investors who want passive income without landlord responsibilities.
Get Your Financing Lined Up Early
The 180-day clock doesn't care about your loan timeline. We help investors get pre-approved for replacement property financing before the exchange starts — so you can close fast when you find the right deal.
For 1031 basics, read our California 1031 exchange overview. For tax rules and pitfalls, see 1031 exchange tax rules and common mistakes.
Better Offers Inc | CA DRE #01212512
1031 exchange financing and strategy