1031 exchange closing checklist

What are the steps, in order?

1. Engage the qualified intermediary before the first closing. The exchange agreement has to be in place before title to the relinquished property transfers. A seller who takes the proceeds first, even briefly, has constructive receipt and the exchange is over. There is no way to fix this after the fact.Before the relinquished closing
2. Put exchange cooperation language in both contracts. Both the sale contract and the purchase contract should contain a cooperation clause acknowledging the exchange and permitting assignment of the contract to the intermediary at no cost or liability to the other side. Buyers and sellers rarely object, but they do object to being surprised.At contract
3. Confirm both properties are held for investment or business use. Section 1031 reaches real property held for productive use in a trade or business or for investment. A primary residence does not qualify, and property held primarily for resale does not qualify. Get this confirmed by your tax advisor rather than assumed.Before contract
4. Assign the contract to the intermediary and direct the proceeds. The relinquished property contract is assigned to the intermediary, written notice goes to the other party, and the deed passes directly from you to the buyer. The proceeds go from the settlement table to the intermediary’s account, never to yours.Relinquished closing
5. Identify replacement property in writing within forty five days. Identification is a signed written notice delivered to the intermediary describing the property unambiguously, within forty five days of the relinquished closing. The three property rule and the two hundred percent rule set how many properties you may name. The deadline does not extend for weekends.Day 1 to day 45
6. Calendar the one hundred eighty day deadline against your tax return. The exchange must close within one hundred eighty days of the relinquished closing, or by the due date of that year’s return including extensions, whichever comes first. A December sale can shorten the window unless the return is extended.Day 1
7. Match the vesting on both sides exactly. The taxpayer who sold must be the taxpayer who buys. A single member LLC disregarded for tax purposes is generally fine; a different entity, an added partner or a change of vesting between the two closings is the classic way an otherwise good exchange fails.Throughout
8. Run full diligence on the replacement property on a compressed clock. Title, survey, municipal searches, environmental review where the property is commercial, and lender underwriting all have to finish inside the one hundred eighty days. Order everything the day the property is identified rather than the day the contract is signed.Day 45 to day 180
9. Plan for debt replacement and boot. Cash you receive and debt you do not replace are treated as boot and are taxable. Where the replacement property carries less debt than the relinquished one, the difference is made up with additional cash or additional financing. Model this before identification, not after.Before identification
10. Close the replacement purchase through the intermediary. The intermediary funds the acquisition and the deed runs directly from the seller to you. Confirm the intermediary’s wire by telephone, and confirm that the New York transfer tax and recording filings reflect the direct deeding structure.By day 180
11. Report the exchange and keep the file. The exchange is reported on Form 8824 with the return for the year of the relinquished sale. Keep the exchange agreement, the identification notice with its delivery proof, both settlement statements and both deeds together.After closing

Which documents do you need?

• Exchange agreement with the qualified intermediary, signed before the relinquished closing
• Assignment of the relinquished property contract to the intermediary, with written notice to the buyer
• Assignment of the replacement property contract to the intermediary, with written notice to the seller
• Written identification notice, signed and dated, with proof of delivery inside forty five days
• Qualified escrow or qualified trust account documentation for the proceeds
• Deeds running directly from seller to buyer on both legs of the exchange
• Settlement statements for both closings, showing the proceeds routed to the intermediary
• TP-584 and RP-5217NYC for each New York closing
• IT-2663 or an exemption where a nonresident is selling New York property
• Owner’s policy on the replacement property
• Form 8824 filed with the return for the year of the relinquished sale

Which searches does this transaction call for?

• Full title search on the replacement property, ordered the day it is identified
• Judgment, federal tax lien and bankruptcy searches against the replacement property seller
• Tax search on both properties, so arrears are cleared at the relinquished closing
• UCC search where the replacement property is commercial or income producing
• Municipal searches on the replacement property: DOB, OATH (formerly ECB), HPD, DEP and fire
• Open permit search on the replacement property
• Survey or ALTA survey on the replacement property, on the compressed exchange schedule
• Patriot search against every party and the intermediary

What else should you read before closing?