A 1031 exchange, commonly referred to as a delayed exchange, is a tax-deferred strategy used in real estate investment. It allows landowners to sell a property and then reinvest the proceeds into another “like-kind” property without recognizing capital gains taxes at the time of the exchange.  The transfer of properties between the qualified intermediary (QI) and the taxpayer constitutes an exchange, not a simple sale and purchase. The Forward Exchange is a type of Safe Harbor Exchange.

In a standard, forward 1031 exchange the taxpayer is relinquishing (the “sale”) property then acquiring replacement (the “purchase”) property. The taxpayer and qualified intermediary (QI) establish an exchange agreement prior to closing a sale transaction. The taxpayer transfers their rights to sell the relinquished property to the QI, who acts as the property seller and holds the funds in an exchange account for the taxpayer’s benefit. The benefit being that the taxpayer is not found to be in constructive receipt of funds. Constructive receipt of funds would invalidate the exchange. Within the initial 45 days of the overall 180 day exchange window, the taxpayer identifies potential replacement properties. Once replacement property or properties are under contract, the rights to acquire it are transferred to the QI through assignment. The taxpayer must complete the purchase within 180 days of selling the relinquished property. The funds held in the exchange account are then sent directly to the closing agent, concluding the exchange and allowing the taxpayer to receive their tax-deferred property.

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