Don’t Make These 1031 Exchange Mistakes!
A 1031 exchange is a tax-deferred exchange allowing an investor to sell a property and use the proceeds to purchase a like-kind property. This process thereby defers the payment of capital gains taxes. However, there are several mistakes that investors can make with 1031 exchanges, including:
Key Takeaways
- Failing to properly identify replacement properties within 45 days using the correct IRS format is one of the most common and costly exchange mistakes.
- Not using a Qualified Intermediary disqualifies the exchange entirely — investors cannot touch or control exchange funds at any point.
- Replacement property must meet the like-kind standard — for real estate exchanges, this generally means any investment or business-use property.
- Failing to reinvest all proceeds creates taxable boot — any uninvested cash is recognized as gain in the year of the exchange.
- Using replacement property for personal purposes after acquisition can retroactively disqualify the exchange under IRS investment-use requirements.
Table of contents
Failing to properly identify replacement property
To qualify for a 1031 exchange, the investor must identify the replacement property within 45 days of the sale of the original property. Additionally, they must close on the new property within 180 days. Failing to properly identify the replacement property within the required timeframe can disqualify the entire transaction.
Not using a qualified intermediary
The IRS requires the use of a qualified intermediary to facilitate a 1031 exchange. This intermediary acts as a middleman, holding the proceeds from the sale of the original property. They use these proceeds to purchase the replacement property. Failing to use a qualified intermediary can also result in the transaction being disqualified.
Not meeting the “like-kind” requirement
The property being sold and the replacement property must be of the same nature or character. They do not need to be identical. For example, an investor can exchange a commercial property for a residential rental property. However, they cannot exchange a property for cash or personal property.
Failing to reinvest all proceeds
To avoid paying taxes on the capital gains from the sale of the original property, the investor must reinvest all proceeds into the replacement property. Failing to do so can result in the investor being required to pay taxes on the portion of the proceeds not reinvested.
Using the replacement property for personal use
If the investor uses the replacement property for personal use or holds it for a short period before reselling it, then the transaction may not qualify as a 1031 exchange. Consequently, the investor may be required to pay taxes on the capital gains from the sale of the original property.
Overall, it’s essential to work with a qualified professional to avoid these and other mistakes when participating in a 1031 exchange. Here at WealthBuilder 1031 Exchange Company, we work with investors in every state in the US. We are here to guide you through every step of the process. To get started, simply contact us at (888) 508-1901 to schedule a consultation.
Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice. Consult your tax advisor or attorney for advice specific to your situation.
Chris Peterson — Texas Licensed Attorney & Founder, WealthBuilder 1031
Chris is the Owner and President of WealthBuilder 1031 and a licensed Texas attorney. He graduated from Wheaton College and the University of Texas School of Law and speaks regularly to realtors, accountants, and title companies about 1031 exchanges. Learn more →
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