The IRS gives you strict timelines — here's how the process unfolds
Sell your relinquished property. Proceeds go directly to the Qualified Intermediary — you never touch the funds.
Identify up to 3 replacement properties (Three-Property Rule), or unlimited properties if total value is ≤ 200% of sale price (200% Rule). Written notice must be delivered to QI by midnight of Day 45.
Close on one or more identified replacement properties. All purchases must be completed by Day 180 or your tax return due date (with extensions), whichever comes first.
Hold replacement property for investment or business use. Report the exchange on IRS Form 8824 with your tax return. Basis carries forward from the relinquished property.
1031 exchanges have strict IRS requirements — violating any one can disqualify the entire exchange
You may identify up to 3 potential replacement properties, regardless of their value. This is the most commonly used identification method.
Alternatively, identify unlimited properties — as long as their combined fair market value doesn't exceed 200% of the relinquished property's sale price.
You have exactly 45 calendar days to identify replacements and 180 days to close. No extensions — not even for weekends or holidays.
Any cash you receive or debt reduction you don't replace triggers taxable "boot." Replace debt dollar-for-dollar and reinvest all net proceeds to achieve full deferral.
A QI must hold your exchange funds — you can never touch the proceeds. Verify their bonding, insurance, and use of segregated accounts before engaging.
Related party exchanges require both parties to hold their properties for at least 2 years. Early disposition by either party triggers the deferred gain.
What happens when a 1031 Exchange fails?
1031 exchanges fail more often than most advisors admit. Properties fall through due diligence, financing collapses, the 45-day identification window closes without a viable replacement, or market conditions shift during the 180-day acquisition period.
When a 1031 exchange fails, the deferred gain becomes immediately taxable — often resulting in a six- or seven-figure tax bill that catches investors off guard.
The Model Q approach plans for this from day one. If your 1031 exchange cannot be completed, the 537 Installment Sale Trust (IST) serves as a fallback strategy — deferring your capital gains while giving you full liquidity and diversification into the Model Q® investment portfolio. No scrambling for replacement property, no panic closings on overpriced assets.