How to Do a 1031 Exchange in Florida

A 1031 exchange, governed by Section 1031 of the Internal Revenue Code, allows real estate investors to reposition their holdings without immediately facing capital gains taxes. This tax-deferral strategy lets an owner sell a property held for business or investment and reinvest the proceeds into a new, similar property. This mechanism is a deferral, not a permanent avoidance of tax, allowing capital to remain invested. The regulations are federal and apply uniformly across the United States, including for properties in Florida.

Core Requirements and Timelines for a 1031 Exchange

A valid exchange requires “like-kind” properties. For real estate, this is a broad concept, meaning the properties must be of the same nature or character, but not the same grade or quality. An investor could exchange a vacant lot for an apartment building or a single-family rental for a commercial office space. Both the relinquished and replacement properties must be held for productive use in a business or for investment, not as a primary residence.

Strict timelines are enforced by the IRS. From the date the relinquished property sale closes, the investor has 45 calendar days to formally identify potential replacement properties in writing to a third party. The investor then has a total of 180 calendar days from the original sale date to close on the purchase of an identified property. These two periods run concurrently. The 180-day deadline can be shortened if the investor’s tax return due date for the year of the sale falls first, though a tax filing extension can restore the full period.

For full tax deferral, an investor must meet specific value and equity requirements. The purchase price of the replacement property must be equal to or greater than the net selling price of the relinquished property. Additionally, all net equity from the sale must be used to acquire the replacement property. Any cash proceeds an investor receives, or any reduction in mortgage debt not offset by new debt, is considered “boot” and is generally taxable.

Information and Professionals Needed for the Exchange

A Qualified Intermediary (QI), also called an accommodator, is required to facilitate a 1031 exchange. The QI is an independent party who holds the sales proceeds from the relinquished property, preventing the investor from having actual or “constructive receipt” of the funds. If the investor receives the money, the exchange is invalidated. The QI prepares the exchange documents, receives the funds from the first closing, and disburses them at the second.

National organizations like the Federation of Exchange Accommodators (FEA) provide directories for locating professionals. Recommendations can also be sought from real estate attorneys, CPAs, and title companies. When vetting a QI, inquire about their fidelity bonding and errors and omissions insurance to ensure the security of exchange funds.

Before the exchange, the investor must provide the QI with a copy of the executed sales contract for the property being sold and a preliminary title report. The QI will also need the names and contact information for all parties in the transaction, including the buyer and closing agent. The investor must also provide their taxpayer identification number and contact details. Having this information organized allows the QI to prepare the necessary legal documents without delay.

The 1031 Exchange Process Step-by-Step

The exchange process begins by formally engaging a QI before the relinquished property sale closes. The investor and QI enter into an Exchange Agreement, which outlines the terms and responsibilities of both parties. The QI provides specific assignment language that must be inserted into the sales contract, making the QI a party to the agreement for the exchange.

With the QI engaged, the next step is closing on the relinquished property. At this closing, the proceeds from the sale are not paid to the seller. Instead, the closing agent wires the funds directly to the QI, who holds them in a secure, segregated account. This action prevents the investor from having constructive receipt of the funds and is a defining element of a valid exchange.

Within the 45-day identification period, the investor must deliver a signed, written notice to the QI that unambiguously describes the potential replacement properties. An investor must follow one of three IRS rules. The 3-Property Rule allows identifying up to three properties of any value. The 200% Rule allows identifying any number of properties if their combined value does not exceed 200% of the relinquished property’s value. The 95% Rule allows identifying any number of properties but requires the investor to acquire at least 95% of their total value.

The investor enters a purchase contract for one of the identified properties and notifies the QI. The QI prepares documents to assign the investor’s rights in the contract to the QI and then wires the exchange funds to the closing agent to complete the purchase. This must be accomplished within the 180-day window that began when the relinquished property was sold.

Reporting the Exchange on Your Tax Return

After the exchange is completed, the transaction must be reported to the Internal Revenue Service. This is done by filing IRS Form 8824, Like-Kind Exchanges, with the investor’s federal income tax return for the year the relinquished property was sold. This form serves as the official record of the exchange and demonstrates compliance with Section 1031.

Form 8824 requires specific details about the transaction. The filer must provide descriptions of both the relinquished and replacement properties, including their addresses. It also requires the dates that the relinquished property was transferred and the replacement property was received. A key part of the form is the section where any recognized gain is calculated, which would apply if the investor received any cash or other non-like-kind property (boot) as part of the exchange.

A significant advantage for those conducting an exchange with Florida property is the state’s tax structure. Florida does not have a personal or corporate state income tax. Consequently, there is no separate state-level tax form equivalent to the federal Form 8824 that needs to be filed. The entire tax deferral benefit and the corresponding reporting requirements are handled exclusively at the federal level, simplifying the compliance burden for the investor.