1031 Exchange Documents: What You Sign and When

A typical forward 1031 exchange involves a short, predictable set of documents. Before your sale closes, you sign an exchange agreement with your Qualified Intermediary and assign your sale contract to them, with written notice to the buyer. Within 45 days of closing, you sign and deliver a written identification of replacement property. Before you buy, you assign the purchase contract to the intermediary and authorize the funds to be sent to closing. Afterwards, you keep the intermediary's final accounting and report the exchange on IRS Form 8824. The timing of each signature matters as much as the signature itself.

Why does the paperwork matter so much?

A 1031 exchange is a set of rules about how a sale and a purchase are structured. The documents are the evidence that the rules were followed. If a document is missing, signed late or signed by the wrong person, the exchange can fail even though the money ended up in the right place. That is why your Qualified Intermediary, closing agent and CPA will all ask for the same few pieces of paper.

What follows describes a standard forward exchange. Reverse and improvement exchanges add further documents, which we touch on at the end. Your intermediary's own forms will differ in wording, and their instructions come first.

What do you sign before the sale closes?

This is the stage people most often leave too late. Once the sale closes and you have received the money, it is generally too late to start an exchange.

• ›Purchase and sale agreement with a cooperation clause. Your contract with the buyer ideally states that you intend a 1031 exchange and that the buyer will cooperate at no cost to them. It is not strictly required, but it avoids an argument later.
• ›Exchange agreement. This is your contract with the Qualified Intermediary. It sets out their role, their fee, how and where funds are held, and the restrictions on your access to those funds during the exchange period. Read the fund handling section carefully.
• ›Assignment of the sale contract. You assign your rights under the sale contract to the intermediary. The deed itself still goes directly from you to the buyer.
• ›Notice of assignment. The buyer, and anyone else who is party to the contract, must receive written notice of the assignment on or before the date the property transfers. This is a regulatory requirement, not a courtesy.

What happens at the sale closing?

At closing you sign the deed and the closing documents as you would in any sale. The difference is where the net proceeds go.

• ›Settlement statement. It should show the net proceeds paid to your Qualified Intermediary, not to you. Check it line by line, because some charges paid from proceeds can create taxable boot.
• ›Closing instructions. Your intermediary will usually send written instructions to the closing agent so the funds are wired directly to the exchange account.

The day this sale closes is day zero. Your 45 day identification period and your 180 day exchange period both start running from it.

What is the 45 day identification document?

Within 45 calendar days of the sale closing, you must identify possible replacement properties in writing.

• ›It must be in writing and signed by you. It is normally delivered to your Qualified Intermediary, using their form.
• ›Each property must be described unambiguously. A street address is generally enough for a building. Land or a unit may need a legal description or parcel number. For a DST, name the specific offering.
• ›It must follow one of the identification rules. Most people use the three property rule. The 200 percent and 95 percent rules exist for larger lists.
• ›It must be received on time. Keep proof of delivery, such as an email confirmation or a signed receipt from the intermediary.

You can revoke and replace an identification in writing within the same 45 days. After day 45, the list is fixed.

What do you sign when you buy the replacement property?

The purchase side mirrors the sale side.

• ›Purchase agreement. Ideally with a cooperation clause, as before.
• ›Assignment of the purchase contract. You assign your rights under the purchase contract to the intermediary, with written notice to the seller.
• ›Funds request or wire authorization. You authorize the intermediary to send exchange funds to the closing agent, usually a few days ahead of closing.
• ›Deed and settlement statement. The deed comes directly from the seller to you. Title should be taken by the same taxpayer that sold the old property, so check the vesting before you sign.

The replacement purchase must close by the earlier of day 180 or your tax return due date for that year, including extensions if you file for one.

What do you keep after the exchange?

The exchange is reported on your tax return for the year in which the sale closed.

• ›Final accounting or exchange summary from the intermediary. It shows the money that came in, the money that went out and any interest or leftover funds.
• ›Both settlement statements. Your CPA will use them to work out any boot and the basis of the replacement property.
• ›Your identification and any revocation. With proof of delivery.
• ›Form 1099 for any interest earned, if the intermediary issues one.
• ›IRS Form 8824. Your CPA files this with your return to report the exchange.

Keep all of it for as long as you own the replacement property, and then for several years after you sell, because the deferred gain and basis carry forward.

How is it different for a reverse or improvement exchange?

In a reverse exchange you buy before you sell, and an Exchange Accommodation Titleholder holds title to one of the properties in the meantime. That adds a qualified exchange accommodation agreement, which must be signed no later than five business days after the titleholder takes title, plus documents for any loan or lease involving the titleholder. Improvement exchanges use a similar structure to hold the property while construction is completed. These are specialised arrangements, so start the paperwork with your intermediary well before any contract is signed.

An illustrative timeline

Here is an illustrative example only, with invented dates.

• ›Day minus 30: sale contract signed, cooperation clause included.
• ›Day minus 7: exchange agreement, assignment and buyer notice signed.
• ›Day 0: sale closes, proceeds wired to the intermediary.
• ›Day 38: identification of three properties signed and delivered.
• ›Day 120: replacement contract assigned, funds authorized, purchase closes.
• ›Following spring: final accounting received, Form 8824 filed with the return.

The short version

Most exchange problems are not about the rules. They are about a document signed a day late or never signed at all. Line up your Qualified Intermediary before the sale contract is signed, keep copies of everything, and let your CPA and intermediary review each stage before you put pen to paper.