The Exchange Process

1. Prepare Your Investment Property

• Identify the property: This must be an investment property (not your primary residence) that has appreciated in value to maximize tax benefits.

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2. Secure a Qualified Intermediary (QI)

• Engage a QI: Before selling, hire a neutral third party called a Qualified Intermediary to hold the proceeds from the sale. The IRS prohibits you from directly touching the money.

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3. Sell Your Property

• List and sell: Market and sell your investment property. The proceeds, minus any selling costs including debt payoff, go to the QI, not your personal account.

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4. Identify Replacement Properties (Within Time Limits)

• Identify options: You have 45 days from the sale date to identify potential replacements. You can choose:

  • Up to three properties regardless of total value.

  • Any number of properties, as long as their combined value doesn't exceed 200% of the sold property's value.

  • Document your selections and submit them to the QI.

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5. Purchase the Replacement Property (Within Deadlines)

• Complete purchase: You have 180 days from the initial sale date to finalize the purchase of a chosen replacement property (or properties). The QI then transfers the sale proceeds to the seller of your new investment property.

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6. Report the Exchange on Your Tax Return