A 1031 exchange is a powerful tool for real estate investors looking to defer capital gains taxes and reinvest in new properties. However, even a small mistake can lead to IRS disqualification, unexpected taxes, and lost investment opportunities. Understanding the most common errors can help you navigate the process smoothly and protect your profits.

Common 1031 Exchange Mistakes and How to Avoid Them

1. Missing the 45-Day and 180-Day Deadlines

The IRS requires that you identify a replacement property within 45 days of selling your current property and close on it within 180 days. Failing to meet these strict deadlines can result in your exchange being invalidated, leaving you with a hefty tax bill.

✅ Solution: Work with an experienced qualified intermediary (QI) to ensure deadlines are met and start searching for a replacement property before selling your current one.

2. Choosing an Ineligible Replacement Property

Not all properties qualify for a 1031 exchange. The replacement property must be “like-kind,” meaning it must be held for investment or business purposes. Personal residences, fix-and-flips, or properties intended for immediate resale do not qualify.

✅ Solution: Ensure your replacement property meets IRS guidelines before committing to an exchange. If in doubt, consult with a 1031 exchange expert.

3. Taking Possession of Funds

If you receive the sale proceeds directly, even for a short period, your exchange is disqualified, and capital gains taxes will apply. The IRS requires that funds be held by a Qualified Intermediary (QI) until the exchange is completed.

✅ Solution: Never take control of your funds. Use a reputable QI to handle the transaction securely.

4. Failing to Reinvest the Full Sales Proceeds

To defer 100% of capital gains taxes, you must reinvest the entire sale amount into the replacement property. If you take out cash or reduce debt on the new property, the difference (boot) may be taxable.

✅ Solution: Match or exceed the sales price of your relinquished property and use all proceeds toward the replacement purchase.

5. Incorrectly Identifying Replacement Properties

You must follow the strict IRS identification rules when selecting a replacement property:

• Three Property Rule – Identify up to three properties, regardless of value.
• 200% Rule – Identify multiple properties as long as their total value doesn’t exceed 200% of the sold property.
• 95% Rule – Identify more than three properties but close on at least 95% of the total value.

✅ Solution: Double-check property identification requirements and submit your selections in writing to your QI before the 45-day deadline.

6. Overlooking Reverse or Build-to-Suit Exchanges

If you find a great property before selling your current one or want to use exchange funds for improvements, a traditional exchange may not be your best option.

✅ Solution: Consider a Reverse 1031 Exchange if you want to buy before selling or a Build-to-Suit Exchange if you plan to renovate or build on a property.

Secure a Successful 1031 Exchange

A 1031 exchange can be a game-changer for real estate investors—but only if executed correctly. By avoiding these costly mistakes, you can preserve your tax benefits, reinvest wisely, and continue growing your portfolio.