Can You Start a 1031 Exchange After Closing?

In almost every case, no. A 1031 exchange has to be set up before the property you are selling closes. The Qualified Intermediary must be engaged, the exchange agreement signed and the sale contract assigned while you still own the property, so that the proceeds go straight to the intermediary instead of to you. Once the sale has closed and the money has been paid out to you, there is generally nothing left to exchange.

This surprises a lot of sellers, because the famous 45 and 180 day deadlines both start at closing. It is easy to assume the planning can start then too. It cannot.

Why does the exchange have to be in place before closing?

There are two reasons, and either one on its own is enough.

The first is the money. If the sale proceeds are paid to you, or held where you can reach them, you are treated as having received them. That is called actual or constructive receipt, and it generally ends the exchange. The safe harbor that protects sellers relies on an intermediary holding the funds under an agreement that restricts your access from the moment of closing. If the money has already been in your account, there is no way to put it back into that structure.

The second is the structure of the deal itself. Under the Treasury regulations, the intermediary is treated as acquiring your property from you and transferring it to the buyer. That happens through an assignment of your rights in the sale contract to the intermediary, with written notice to the other parties on or before the date the property transfers. A document signed after the deed has recorded cannot reach back and change who was a party to that transfer.

What does engaging the Qualified Intermediary actually involve?

Engaging an intermediary is more than a phone call. Before closing, you would normally expect to complete the following:

• ›Sign an exchange agreement with the intermediary, setting out how the funds are held and when they can be released
• ›Assign the sale contract to the intermediary, so it steps into your rights as seller for the purposes of the exchange
• ›Notify the buyer and the closing agent of that assignment in writing
• ›Provide wiring instructions so the closing agent sends the net proceeds directly to the intermediary
• ›Confirm the vesting so the same taxpayer that sells is the one that will buy the replacement property

None of this changes how the buyer pays or what the buyer receives. Buyers are often asked to sign a short acknowledgement, which is why many sellers add a cooperation clause to the sale contract at the start.

How early should you call an intermediary?

Earlier than most people do. The practical answer is as soon as you sign a contract to sell, and ideally when you list the property. That gives the intermediary time to review the contract, prepare documents and coordinate with the closing agent without a rush.

An intermediary can often set up an exchange in a few days, and sometimes faster. But last minute setups are where mistakes happen. A closing agent who receives instructions the morning of closing may already have prepared the disbursement to your account. A missing signature can push the whole thing past the moment that matters.

What if your closing is tomorrow?

Call a Qualified Intermediary today and tell them the closing date in the first sentence. Also call your closing agent and tell them an exchange is being set up, so they hold off on preparing a disbursement to you. If the closing has to move by a day or two to get the documents right, that delay is usually far cheaper than losing the exchange.

Do not let anyone talk you into receiving the money "for now" with a plan to send it on later. That plan is the failure, not the workaround.

What if you have already closed?

If the sale has closed and the proceeds were paid to you, the exchange is generally not available for that sale. Returning the money, opening an account in someone else's name, or preparing documents with an earlier date does not fix it, and backdating documents creates a far bigger problem than the tax itself.

If the facts are unusual, for example the funds never left the closing agent and were held under some form of restriction from the start, have your CPA and an intermediary review the exact documents straight away. Do not assume a rescue is possible, and do not wait to ask.

If the exchange is truly gone, your CPA may discuss other planning for the gain. Some sellers in this position look at a Qualified Opportunity Fund, which has its own 180 day investment window and very different rules, risks and outcomes. Whether anything applies depends entirely on your situation.

Does the same rule apply to a reverse exchange?

Yes, and arguably more strictly. In a reverse exchange you buy the replacement property first. The arrangement with the party that will hold title, often called an exchange accommodation titleholder, has to be in place before that purchase closes. If you take title to the new property in your own name first, the reverse exchange safe harbor is generally not available.

A short pre closing checklist

Here is what to confirm in the week before a sale closes. It is not a substitute for advice from your own advisers.

• ›Exchange agreement signed by you and the Qualified Intermediary
• ›Assignment and notice signed, with copies to the closing agent
• ›Wiring instructions confirmed by phone with the closing agent, sending proceeds to the intermediary
• ›Draft settlement statement reviewed by your CPA for cash to seller lines or credits that may become boot
• ›Calendar set for day 45 and day 180, remembering that the exchange period can end earlier if your tax return due date, including extensions, comes first

Illustrative timing example

This is an illustrative example only. An owner signs a contract to sell on September 1 with a closing set for October 15. If they call an intermediary in the first week of September, they have roughly six weeks to get documents prepared, the buyer notified and the closing agent instructed. If they call on October 14, they have one day, and any missing signature can cost them the exchange. The law is the same in both cases. The only difference is the margin for error.

The takeaway

The 1031 clock starts at closing, but the exchange itself has to be built before closing. Treat engaging the Qualified Intermediary as part of the sale, not part of the purchase. This article is general education, not tax or legal advice, so speak with your CPA and your Qualified Intermediary as soon as a sale is on the horizon, and before any money moves.