The cash paid by the buyer is "parked" with the QI until the taxpayer is able to identify

and close on the replacement property.

 Within 45 days of sale of the relinquished property, the taxpayer must "identify"

the replacement property. The identification must be specific, such as the address of the

property to be acquired. To allow for the possibility that the taxpayer may not be able to

come to terms with the owner of the potential replacement property, the taxpayer may

designate more than one replacement property.4

 The taxpayer must acquire one or more of the identified replacement properties

within 180 days of the date of the closing of the relinquished property; that is, the 45 and

180 day periods run concurrently. There are no exceptions to these time limits and failure

to comply will convert the transaction to a fully taxable sale. At the closing of the

replacement property, the QI transfers cash to the seller of the replacement property and

the seller transfers ownership to the taxpayer. This second phase of the delayed exchange,

often referred to as the taxpayer's "up-leg," is depicted in the bottom portion of Figure

2.5

Basic Requirements of a Valid Section 1031 Exchange

 In general, both real and personal property can qualify for tax-deferred treatment.

However, some types of property are specifically disqualified; for example, stocks,

bonds, notes, and ownership interests in a limited partnership or multi-member limited



4 More specifically, the taxpayer can (1) identify up to three properties of any value or (2) identify more
than three properties so long as their combined values do not exceed 200 percent of the value of the
relinquished property.

5 If the taxpayer closes on the replacement property prior to the sale of the relinquished property, the
transaction becomes a ic\ iii" exchange. This dataset does not include a large enough sample of reverse
exchanges to examine empirically how the pricing of such exchanges varies from delayed exchanges and
fully taxable sales. I therefore do not discuss reverse exchanges here.