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1031 Disclosure

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1031 Disclosure

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The most common type of exchange that taxpayers will take advantage of is the delayed exchange. This delayed exchange allows a taxpayer to sell their replacement property and then there will be a delay before the acquisition of the replacement property.


The delayed exchange allows taxpayers up to 180 calendar days to close (to take fee simple interest) on their replacement property from the closing of their relinquished property. This process is allowed due to Starker v. U.S. 602 F2d 1341 (9th Cir 1979). The steps to achieve the tax deferral through this process can be easy when you are working with a Qualified Intermediary like Security 1st Exchange.


  • Sale of the Relinquished Property: The taxpayer will have their relinquished property under contract. In it, they should include language that they will participate in a 1031 Exchange. They will then retain the services of a Qualified Intermediary (QI) like Security 1st Exchange. Security 1st Exchange will prepare exchange documentation before the closing of the sale to be executed by all parties to the transaction. Security 1st Exchange will coordinate with the settlement agent and instruct them to transfer the proceeds of the sale to Security 1st Exchange, not to the seller. This is to avoid and actual or constructive receipt issues which could invalidate the 1031 Exchange. After closing, the taxpayer cannot have access to the funds in the 1031 account during the exchange period. The tax code is very specific on this issue and defines when a taxpayer can receive their funds back.
  • Replacement Property Identification: Within 45 calendar days of the closing of the relinquished property, the taxpayer must identify the replacement property. To properly identify, this must be done in a written document "signed by the Exchanger and hand delivered, mailed, telecopied, or otherwise sent to the person obligated to transfer the replacement property to the Exchanger". It is customary to identify with the QI during this process.
  • When identifying replacement property, the taxpayer is limited as to how many properties may be identified. There are three rules that the IRS established in which the taxpayer must follow one of the three rules:
    • 3 Property Rule: Any three properties no matter their fair market values; or
    • 200 Percent Rule: Any number of properties as long as their aggregate fair market values do not exceed 200% (or double) of the sales price of their relinquished property; or
    • 95 Percent Rule: Any number of properties without regard to value. But using this rule, the taxpayer must acquire 95% of the value of the identified properties for a valid identification.
  • Acquisition of Replacement Property: Within 180 calendar days of the transfer of ownership of their relinquished property, the Exchang or must acquire their like kind property. And just as in the sale of the relinquished property, Security 1st Exchange will prepare documentation to immortalize the transaction to meet the IRC Section 1031 requirements.


In both the relinquished and replacement property closings, Security 1st Exchange will not be in the chain of title. Security 1st Exchange will instruct the settlement agents to directly deed the property from the seller to the buyer, omitting Security 1st Exchange from any deeds.