Because of numerous legal requirements and 1031 tax exchange regulations, every 1031 tax exchange is a closely monitored procedure with many rules, time limits, and stipulations. As a general rule, the guidelines set out by the government are not difficult to follow - but they must be followed to an absolute "T."

When working with an organization that specializes in 1031 tax exchanges, you'll find that the steps required to begin an exchange are very straightforward and easy. Generally, once you have signed your purchase and sale contract and made the necessary arrangements with your title and escrow company to close the transaction, you can move forward on setting up the 1031 exchange. You will provide basic information about the property you have sold and the property you intend to buy, and, generally, pay all or a portion of an administrative fee that covers costs associated with managing your exchange. Generally, the 1031 specialist will then take the wheel for the remainder of the transaction.

1031 Tax Exchange Steps

In a more specific sense, the following are the steps that must be followed in order to complete a typical 1031 exchange:

1. Retain the services and advice of a Certified Public Accountant. Why? You're working with complicated tax code - and you need someone on your side who understands it thoroughly.

2. Sell your property and include a Cooperation Clause in the sales agreement which states that you intend to complete a 1031 exchange. This is required so that the buyer is notified and is able to cooperate to make the exchange happen smoothly.

3. Using a Qualified Intermediary, enter into a 1031 exchange agreement that meets IRS guidelines. Sign an amendment that identifies your Qualified Intermediary as the seller. An important note: you do not yet have to identify a replacement property.

4. The relinquished escrow closes (reflecting the Qualified Intermediary as the seller) and sale proceeds are placed in a separate, segregated account to ensure safety. The 180-day clock begins to tick.

5. Within 45 days, declare (in writing, via certified mail) the address of your replacement property to your Qualified Intermediary, the seller of your replacement property, or a third-party attorney.

6. Enter the agreement to purchase your replacement property, again including a Cooperation Clause so that the seller is aware of your current 1031 exchange status. Again, include an amendment that names your Qualified Intermediary as the buyer, but name yourself for deeding purposes.

7. When it is time for escrow to close, the Qualified Intermediary forwards transaction funds to escrow. The closing statement names your Qualified Intermediary as the buyer. Your Qualified Intermediary sends you a formal statement that shows the transfer of money.

8. File form 8824 to the IRS with your annual tax documents. File any required state forms.

Once your yearly tax forms are filed - congratulations! You've successfully completed a 1031 tax exchange and managed your real estate investment with an incredible amount of savvy.