As a general rule, when the value of real estate increases while you own it, that increase is “gain” which can be taxed.

EXAMPLE – Sam buys 8701 Dodge Building for $500,000 in 2005.  Sam holds the building until 2019.  In 2019, Sam sells the building for $1.5MM.  Sam has realized $1MM in taxable gain.

COST BASIS – In simplest terms, the “cost basis” is the amount the property was originally purchased for, though the basis may be adjusted over time for other factors such as improvements or depreciation.  In the example above, the cost basis is $500,000.

LONG TERM GAINS – On most property held for over one year, the basic capital gains will be either 15% or 20% depending on the income of the Taxpayer.  For example, on the $1MM gain in the example above, Sam would owe either $150,000 or $200,000 in capital gains tax depending on his income.


DEFERRAL – A 1031 exchange defers but does not eliminate the capital gains tax owed at the time of sale.  Thus, the Taxpayer does not owe capital gains at the time of sale but instead defers those gains into a new “Replacement Property”.  Essentially, the amount of gains present at the time of sale of the “Relinquished Property” are subtracted from the Cost Basis of the new Replacement Property, resulting in an adjusted basis in the Replacement Property and thus “deferring” the gains into the new Replacement Property. 


  1. Forward Exchange
  2. Reverse Exchange
  3. Improvement Exchange


  1. Sell the “Relinquished Property”
  2. Have Qualified Intermediary hold the proceeds of the sale (Taxpayer must never exercise control over the proceeds)
  3. Use proceeds to purchase a “Replacement Property”

Author’s Note:  Most exchanges are forward exchanges.  This is overwhelmingly the most common and simplest method of executing an IRS Section 1031 Like Kind Exchange. 

HOW DOES A REVERSE EXCHANGE WORK? – There are 2 types of Reverse Exchanges:

  1. Exchange First
  2. Exchange Last


Park the Relinquished Property with an Exchange Accommodation Titleholder (EAT)

The EAT is a separate, single purpose entity (LLC) created by TitleCore Exchange.  The purpose of the EAT is to hold title to the Relinquished Property until such time as the Taxpayer is able to sell it.  The EAT acts as the legal titleholder of the Relinquished Property.  The Taxpayer maintains most of the rights and obligations of the land ownership through series of agreements executed between the EAT and the Taxpayer. 

Purchase the Replacement Property through a Qualified Intermediary

The EAT will sell the Relinquished Property within 180 days of closing on the Replacement Property


Purchase the Replacement Property and have it titled in the name of an EAT. 

The EAT is a separate, single purpose entity (LLC) created by TitleCore Exchange.  The purpose of the EAT is to hold title to the Replacement Property until such time as the Taxpayer is able to sell the Relinquished Property.  The EAT acts as the legal titleholder of the Replacement Property.  The Taxpayer maintains most of the rights and obligations of the land ownership through series of agreements executed between the EAT and the Taxpayer. 

EAT will hold property for up to 180 days while the Taxpayer sells the Relinquished Property

Sell the Relinquished Property and use a Qualified Intermediary to “buy” the Replacement Property from the EAT.


Because Reverse Exchanges are more complicated they can present several issues.  The 2 most common issues are related and can be understood in simplest terms as:

The CASH ISSUE – Unlike a forward exchange, the Taxpayer in a reverse exchange will not have sold the Relinquished Property when they purchase the Replacement Property.  Therefore, they will not have the benefit of the proceeds from the Relinquished Property when they close on the Replacement Property.  This means the tax payer will need either:

  1. Cash sufficient to “cover” the expected proceeds, OR
  2. A loan sufficient to “cover” the expected proceeds.

This leads to the 2nd issue:

The LENDER ISSUE – Typically loans made for purchase of real estate will be secured by that real estate.  The real estate is typically owned by the Lender’s client (ie, the Borrower).  Thus, the Borrower is capable of pledging the real estate to the Lender as security for the loan.  However, in a Reverse Exchange, the Borrower is not in title to the real property that will likely need to be collateralized to secure the loan (ie, the Replacement Property).  Instead, the EAT will be in title to the Replacement Property at the time the loan is closed.  This can cause significant issues and delays with loan closings if not addressed early with the Lender.

Author’s Note:  In part due to these issues, Reverse Exchanges are not near as commonly used as Forward Exchanges.


Sell the Relinquished Property

Have the proceeds held by a Qualified Intermediary

Purchase the Replacement Property and have it titled in an EAT

The Replacement Property is typically bare ground used for construction, but does not need to be.  The Replacement Property can be an existing structure which the Taxpayer is going to improve.

Qualified Intermediary will use proceeds held to pay acquisition of Replacement Property and for improvements.

Once all the required funds have been spent on the Replacement Property and improvements, the EAT will transfer the Replacement Property back to the Taxpayer


TIMELINES ARE TIGHT – The standard exchange deadlines apply to improvement exchanges as well.  Therefore, the Replacement Property must be purchased and all necessary improvements constructed and paid for within 180 days of closing on Relinquished Property.  ***

DESCRIPTIONS FOR IDENTIFICATION – As with all Replacement Property identifications, the identification of Replacement Property in an Improvement Exchange must sufficiently describe the property.  In an Improvement Exchange, that means including a description of the improvements to be constructed.  There is no clear rule for exactly how specifically the improvements must be identified, but in all cases the improvements should be identified as specifically as they can be. 


The Same Taxpayer Requirement – The same Taxpayer must own the Relinquished Property and the Replacement Property.  This will be dictated by how the Relinquished Property is held. 

Exchange vs. Sale and Purchase – A fundamental principle of a 1031 Exchange is that the Taxpayer never receives the proceeds thus there is no taxable event which would trigger capital gains tax to be due.  Therefore, the Taxpayer must have no control over the proceeds of the sale at any time.  This is a firm rule.  The funds must go directly from closing to a Qualified Intermediary.  If the Taxpayer exercises any control over the proceeds from the sale, then the Exchange is blown. 

Business/Investment Requirement – The real property must be held for business or investment purposes.  The real property must not be held for personal use or held primarily for sale.

1031 Exchanges will not work for personal residences (held for personal use)

1031 Exchanges will not work for merchant sellers (held primarily for sale)

Like-Kind Requirement – The Relinquished Property and the Replacement Property must be of “like kind” with one another.  All real property in the United States is considered “like kind” with all other real property in the United States.  It does not matter if it crosses “sectors”.  For example, an office building in Tennessee may be exchanged for farm land in Idaho.  However, personal property is not eligible for 1031 treatment. 


The “clock” starts with the first closing.  In a forward exchange, the clock starts with the closing of the Relinquished Property.  In a Reverse Exchange, the clock starts with the closing of the Replacement Property. 

45 days to “identify” the Replacement Property (or the Relinquished Property in an Exchange Last Reverse Exchange)

Identification must:

  1. Sufficiently describe the property (usually address or legal description)
  2. Be in writing
  3. signed by the Taxpayer
  4. Be delivered to somebody qualified to receive it (usually the QI)

Taxpayer may identify up to 3 separate properties regardless of value.  In some circumstances, the Taxpayer may identify more than 3 properties.  However, if the Taxpayer chooses to identify more than 3 properties, there will be value restrictions on what can be identified. 

Must close on the Replacement Property (or Relinquished Property in the case of Reverse Exchanges) by the earlier of:

  • 180 days from first closing, or
  • The date on which the taxes from the sale of the relinquished property are due (including extensions)

The timelines are very firm.***  Missing either timeline by even one minute will invalidate the exchange.  Extensions are not given for weekends or holidays and are only given in extremely rare circumstances.  Taxpayers should meet timelines and should not expect an extension to be given. 


– Call TitleCore Exchange for all your QI and EAT needs.  We are always happy to assist. 

DISCLAIMER – 1031 Exchanges are complicated transactions that should include advice from a CPA or other Tax Advisor.  While TitleCore Exchange, LLC, is happy to work as your Exchange Accommodation Titleholder and/or Qualified Intermediary, we cannot act as your Tax or Legal Advisor.  The foregoing document is provided for informational purposes only.  Nothing contained herein should be construed as tax or legal advice. 

***Timelines listed herein pertain to “Safe Harbor Exchanges”.  There are exchange structures which may fall outside the “Safe Harbor” rules.  TitleCore Exchange, LLC, generally participates as QI and/or EAT in only Safe Harbor Exchanges and generally does not participate as either QI or EAT in Non-Safe Harbor Exchanges.  If you seek further advice about Non-Safe Harbor Exchanges, please consult your CPA or other Tax or Legal Advisor. 

AUTHOR BIO – Sam J. Cooper is a Commercial Escrow Officer at TitleCore National.  Sam is a licensed attorney in Nebraska and Iowa and a licensed Title Insurance Producer in Nebraska.  Sam graduated from the University of Nebraska at Omaha with his undergraduate degree in 2009 and from the University of Nebraska College of Law in 2012.  Prior to joining TitleCore National, Sam spent 4 ½ years as a Deputy County Attorney in Lancaster County, Nebraska.  Sam is a member of the CRE Summit Stakeholders Committee, Co-Chair of the NLTA Legislative Committee, and Member of Leadership Omaha Class 42.  Sam is also a former presenter at NLTA Spring Conference and Fall Convention.  Sam lives in Omaha with his wife (Kate), 3 sons (Sam, Jim and Jack) and 2 dogs (Red & Vito).  When time allows, Sam enjoys running, losing golf matches and reading.