Avoid These 5 Costly Mistakes When Completing Your 1031 Exchange

The benefits of a 1031 exchange are real—but so are the risks if it's handled incorrectly.

We see investors make the same preventable mistakes over and over again—often costing

them thousands (or more) in taxes and penalties.

1. Missing Key Deadlines

The 45-day identification window and 180-day closing period are non-negotiable. Missing either deadline kills your exchange, no matter the reason. Always track deadlines carefully.

2. Mishandling “Boot” (Cash Received)

If you end up receiving cash or non-like-kind property during the exchange, that portion is

taxable. Receiving boot—intentionally or accidentally—can reduce or eliminate your tax deferral benefit.

Example:

Selling a property for $800,000, buying a new one for $750,000, and pocketing $50,000? That $50,000 is immediately taxable.

3. Failing to Properly Identify Properties

Simply making an offer or verbally mentioning a property doesn’t meet IRS standards.

You must submit written identification, following strict rules about description and delivery to the Qualified Intermediary.

4. Changing Ownership Mid-Exchange

The same tax entity that sells the relinquished property must acquire the replacement property. Switching from individual ownership to an LLC—or vice versa—during the exchange can void it.

5. Poor Recordkeeping

Inadequate documentation is a major red flag for IRS scrutiny.

Make sure you keep clear, organized records of all:

• Identification forms

• Contracts

• Settlement statements

• Communications with your intermediary

A 1031 exchange offers powerful tax advantages, but small missteps can lead to major

setbacks. Missing deadlines, mishandling paperwork, or misunderstanding IRS rules can quickly turn a smart investment move into an expensive mistake.

By understanding where exchanges commonly go wrong, and taking proactive steps to avoid those pitfalls, you can protect your tax deferral, safeguard your investments, and set yourself up for long-term success. Careful planning, attention to detail, and the right professional guidance are key to making your 1031 exchange work exactly as intended.

Final Thought

A 1031 exchange isn’t something to "wing"—it’s a highly structured, time-sensitive transaction that demands precision. With careful planning and experienced legal guidance, you can avoid these common 1031 mistakes—and make your next investment work even harder for you.