Escrow for 1031 exchanges

It’s a trade of one investment property for another under Section 1031 of the tax code. Since 2018 it covers only real property held for business or investment, not property held mainly for sale, and not equipment, vehicles or art (IRS).

Cash or other property you receive that isn’t like-kind real property is called boot, and it’s taxable to that extent. The exchange is reported to the IRS on Form 8824.

1. 01

   Step 1: Choose an intermediary before the sale closes

   A qualified intermediary signs a written exchange agreement with you to take the property you’re giving up and to buy and pass on the replacement property (FTB). Using one is one of the IRS’s safe harbors.

2. 02

   Step 2: The sale escrow closes

   The money from your sale goes to your intermediary, not to you.

   HeldYour intermediary holds the sale money.

3. 03

   Step 3: Name the new property within 45 days

   You identify the replacement property in writing within 45 days after the old one is transferred (IRS Form 8824 instructions).

4. 04

   Step 4: The purchase escrow opens

   Your intermediary sends the money for the new property to its escrow.

   CheckedThe money arrives from your intermediary, not from you.

5. 05

   Step 5: Close within 180 days

   You receive the new property within 180 days, or by your tax return’s due date, including extensions, if that comes first.

   ReleasedThe deed records in your name.

California collects real estate withholding, an advance payment of the seller’s income tax, usually 3 1/3% of the sales price (FTB). The seller tells escrow about an exemption, or about an exchange, on Form 593 before closing.

In a deferred exchange, the intermediary, not escrow, withholds and sends in the tax when it’s due: for example, when you receive more than $1,500 in boot, or if the exchange fails (FTB).