Once the basic concept of a 1031 exchange is understood, the next step is to examine how these transactions are structured in practice. Modern exchanges typically involve multiple parties, strict timelines, and the use of a qualified intermediary. This second article in the series focuses on the mechanics of a standard delayed exchange, the “same taxpayer” requirement, and the basic framework for reverse exchanges.

The Structure and Process

Most modern 1031 exchanges involve multiple parties and transactions rather than a simple two-party swap. The most common structure includes:

• The Exchanger (Taxpayer) – the investor selling the relinquished property and acquiring the replacement property
• The Buyer – who purchases the relinquished property
• The Seller – who sells the replacement property
• The Qualified Intermediary (QI) – a neutral third party who facilitates the exchange

The Role of the Qualified Intermediary

The primary function of the QI is to prevent the exchanger from having actual or constructive receipt of the sale proceeds. If the taxpayer receives or is deemed to have received the proceeds, the transaction will not qualify as a tax-deferred exchange, and gain will be recognized. 

To avoid this result, the QI:

• Enters into an exchange agreement with the taxpayer.
• Receives and holds the sale proceeds from the disposition of the relinquished property, typically in a segregated escrow or trust account.
• Uses those proceeds to acquire the replacement property on behalf of the taxpayer.
• Prepares the necessary exchange documentation.
• Monitors and documents compliance with identification and exchange deadlines.

The “Same Taxpayer” Requirement

A fundamental requirement of a 1031 exchange is that the taxpayer disposing of the relinquished property must be the same taxpayer acquiring the replacement property. While this requirement is not set forth verbatim in the statute, it is well established in IRS guidance and case law.

Notably, this analysis focuses on the taxpayer’s tax identification number rather than on how title is held. For example:

• If an individual owns relinquished property in his or her own name and reports income under a Social Security Number, that same individual must be the taxpayer with respect to the replacement property.
• Title to the replacement property may be held in a single-member limited liability company that is disregarded for federal income tax purposes, provided the disregarded entity uses the same taxpayer’s identifying number.

This approach offers some flexibility for liability and financing considerations, as long as the underlying taxpayer remains consistent. Changes in entity structure that alter the taxpayer (for example, from an individual to a partnership) can jeopardize exchange treatment and must be analyzed carefully by knowledgeable and experienced tax advisors.

Statutory Timelines: Identification and Exchange Periods

Two strict and concurrent time periods govern every standard delayed 1031 exchange, the noncompliance with which will disqualify the exchange:

• The 45-day identification period; and
• The 180-day exchange period.

The 45-Day Identification Period

The date the relinquished property closes, the taxpayer has exactly 45 calendar days to identify potential replacement properties. The identification must:

• Be in writing;
• Be signed by the taxpayer;
• Be delivered to the qualified intermediary or another permitted party; and
• Unambiguously describe each property, typically by street address, legal description, or Assessor’s Parcel Number (tax PIN).

The taxpayer must also comply with one of the following identification rules:

• Three-Property Rule: Up to three potential replacement properties of any value may be identified. The taxpayer must acquire at least one of these properties.
• 200% Rule: More than three properties may be identified, provided the aggregate fair market value of all identified properties does not exceed 200% of the value of the relinquished property.
• 95% Rule: If neither of the first two rules is satisfied, the exchange may still qualify if the taxpayer acquires at least 95% of the total value of all identified properties.

In practice, many exchanges rely on the three-property rule because of its relative simplicity.

The 180-Day Exchange Period

The taxpayer must acquire one or more replacement properties no later than 180 calendar days after the closing of the relinquished property. Note, the 45-day identification period and the 180-day exchange period run concurrently, not consecutively.

As a result:

• The taxpayer has a total of 180 days from the sale of the relinquished property to complete the purchase of the replacement property.
• If all 45 days are used for identification, only 135 days remain to close on the replacement property.

These deadlines are inflexible, measured in calendar days, and do not shift if the last day falls on a weekend or holiday. Missing either the 45-day identification or the 180-day completion deadline will result in immediate tax recognition.

Special Exchange Structures

In some cases, the taxpayer needs to acquire the replacement property before selling the relinquished property, requiring a “reverse” 1031 exchange.

A reverse exchange generally involves an Exchange Accommodation Titleholder (EAT), usually a single-purpose entity, that temporarily takes title to either the relinquished property or the replacement property (the “parked” property). The EAT holds that property until the taxpayer can complete the sale or acquisition of the other property.

The same 45-day and 180-day timelines apply, but they are measured from the date the EAT acquires the parked property. Reverse exchanges are more complex and typically more costly than standard delayed exchanges. These transactions require careful coordination with lenders and title insurers.

Summary

A compliant 1031 exchange requires more than simply selling one property and buying another. The taxpayer must engage a qualified intermediary, adhere to strict identification and closing deadlines, and ensure that the same taxpayer disposes of the relinquished property and acquires the replacement property. For more complex transactions such as reverse exchanges, early planning and professional guidance are essential.

The final article in this series will address tax implications, including “boot,” depreciation recapture, long-term planning opportunities, and best practices for executing an exchange.

To reference Part One of this article from a previous Savannah CEO post, please go to: 

https://savannahceo.com/features/2025/12/understanding-1031-kind-exchange-practical-guide-real-estate-investors-part-one-basics/ 

For more information about 1031 exchanges or to discuss your specific real estate investment goals, contact Stuart F. Wallace at (912) 236-0261 or the HunterMaclean Real Estate team.