A 1031 exchange can be one of the smartest moves in a real estate investor’s playbook. It lets you postpone capital earnings levies by rolling the proceeds from one property into another “ like- kind ” investment. When done right, it can accelerate portfolio growth and keep your cash inflow strong.
But when it’s done wrong? You could be gaping down a hefty duty bill, unanticipated penalties, and missed openings.
To make sure your exchange works in your favor, then are the most common miscalculations investors make and exactly how to avoid them.
1. Missing the Deadlines
The IRS doesn’t accept defenses when it comes to 1031 timelines. You have
- You have a 45-day window after selling your property to select your potential replacement properties.
- You have 180 days from the exchange date to complete the purchase of the new property. Miss either date, and your exchange could be abrogated.
Avoid it As soon as your property goes under contract, mark these deadlines in your timetable. Work closely with your good Central (QI) to ensure everything stays on track.
2. Touching the trade Proceeds
If the proceeds from your trade land in your bank account—indeed for a single day—the IRS considers it “ formative damage.” That incontinently disqualifies your exchange.
Avoid it. Hire an estimable QI beforehand. Have them set up an escrow account before your ending so you never have to handle the finances face-to-face.
3. Picking an Ineligible relief Property
Not every property qualifies for a 1031 exchange. Primary places, holiday homes used substantially for particular enjoyment, and some foreign parcels do n’t meet the IRS “ like- kind ” description.
Avoid it Confirm with your duty counsel before making an offer. Generally, these are properties in the U.S. held for investment or business use.. Marketable, so marketable can be shifted for marketable, reimbursement for reimbursement.
4. Mistaking “ Like-Kind ”
Numerous people suppose “like-kind” means switching identical parcels. Not true. You can swap an apartment building for raw land, as long as both are located in the U.S. and held for investment or business purposes.
Focus on the property’s purpose and intent, rather than its specific type.
5. Forgetting About the Costs
A 1031 exchange is n’t free. Anticipate to cover
- ending costs
- QI freights
- examination and due industriousness charges
Still, you may owe levies on the “”charge”—the taxable difference—if your relief property is cheaper than your original.
Avoid it. Run the figures with your accountant before you vend. Factor in all costs so you don’t get blindsided.
6. Not Having a Provisional Plan
Deals fall through all the time—examinations fail, financing booths, or merchandisers get cold feet. However, you risk losing your duty postponement if you’ve only linked one relief property and it falls piecemeal.
Use the three-property rule to identify multiple parcels within your 45-day window.
7. Going the DIY Route
A do-it-yourself 1031 exchange might save on outspoken freights—but the rules are complex and enduring. One wrong move can bring you far more than a professional’s figure.
Avoid it. Work with a good Central, duty counsel, and real estate attorney experienced in 1031 exchanges.
Final Takeaway
A 1031 exchange can be an important tool to grow your real estate portfolio and save your wealth, but only if every step is handled rightly. Deadlines, eligibility rules, and IRS conditions leave no room for error.
Plan ahead. Partner with experts. Cover your proceeds.
The more duty bones you keep working for you, the more briskly your portfolio can grow.