Most 1031 exchanges are lost in the first 45 days, and usually on paperwork rather than on tax law. Our companion piece walks the full timeline. This one is narrower: the identification rules, and how to pick the qualified intermediary who will be holding your money while the clock runs.

Line up the QI before you sign

You cannot receive the sale proceeds. Not for an afternoon, not into your own escrow account. If the funds touch you, the exchange is over and the gain is taxable. That means the qualified intermediary has to be engaged before the sale closes, and ideally before you sign the purchase agreement, so the exchange language goes into the contract and the assignment gets done in time.

QIs are not licensed or regulated at the federal level, which surprises people. Ask how exchange funds are held and in whose name, whether they sit in segregated qualified escrow accounts, what fidelity bond and E&O coverage the firm carries, and who authorizes a release of funds. A QI who cannot answer that in one call is not the one.

Also confirm they are not disqualified: your own CPA, attorney, or agent who has served you in that capacity within the two years before closing generally cannot act as your intermediary. We set the structure up with you; a third party holds the money.

The three identification rules

By midnight of day 45 you must deliver a written, signed identification to your QI. Not a text to your broker. The description has to be unambiguous: street address or legal description, and for a fractional or DST interest, the percentage you are acquiring. You can revoke and re-identify as often as you want before day 45, and not at all after.

You then pick one of three counting rules:

  • Three-property rule. Up to three properties, any value. This is what most exchanges use.
  • 200 percent rule. Any number of properties, as long as their combined fair market value is not more than 200 percent of what you sold.
  • 95 percent rule. More than that, but then you must actually acquire at least 95 percent of the value identified. A fallback, not a plan.

Where people get hurt

Identifying one property and nothing else, then watching the deal fall out of contract on day 50.

Describing a property too loosely for the identification to hold up.

Leaving the QI paperwork until the week of closing.

Forgetting that day 180 is cut short by your filing deadline if you sell late in the year and do not extend.

None of this is complicated, but it is unforgiving, and it happens while you are also trying to buy a building. If you are planning a sale in Los Angeles this year, send us the escrow timing and the debt on the property and we will walk through what your 45 days will realistically look like.

LaviCPA is at 7707 Sunset Blvd, Los Angeles. Call 323-463-2600 or book a complimentary consult with Elias Lavi, CPA.