A 1031 like-kind exchange defers the recognition of gain on the disposition of business or investment property. The tax benefit is substantial — but it is contingent on strict compliance with identification and closing deadlines, and on maintaining the documentation required to support the deferred gain and adjusted basis throughout the holding period of the replacement property.
The Timelines That Cannot Slip
The 45-day identification period and 180-day exchange period are hard deadlines. Miss either, and the exchange fails — the gain is recognised in the year of disposition. Track these dates explicitly in your workpapers and calendar system from the moment the relinquished property is closed.
Records to Keep
The Qualified Intermediary Agreement
The qualified intermediary (QI) arrangement is the legal mechanism of the exchange. Retain the QI agreement and all correspondence. If the QI holds exchange proceeds, maintain records of the escrow and the release of funds to acquire the replacement property.
Identification Notice
The written identification of replacement properties within the 45-day window must be retained. The identification notice — signed and dated — is the documentary foundation of the timeline compliance. If the identification is by written notice to the QI, keep a copy of the notice and confirmation of delivery.
Closing Statements for Both Properties
The closing statement for the relinquished property establishes the amount realised. The closing statement for the replacement property establishes the acquisition cost. Both are required to compute the deferred gain and the adjusted basis of the replacement property.
Basis Trail
The adjusted basis of the replacement property in a 1031 exchange is not the purchase price — it is the substituted basis from the relinquished property, adjusted for boot received, liabilities assumed, and exchange expenses. Maintain a formal basis computation in the workpapers and update it each year as depreciation is taken.
Subsequent Disposition
When the replacement property is eventually sold in a taxable transaction, the deferred gain from the original exchange is recognised. If multiple 1031 exchanges have occurred in a chain, the basis trail and deferred gain computation must be reconstructed across all transactions. Maintaining clear records from each exchange is the only practical way to manage this complexity.
Marcken Solutions supports documentation and reporting for like-kind exchange engagements. Speak with our team about your 1031 documentation requirements.