Dear John,
I’ve got a rental property I’m planning to sell this spring, and I’d like to do a 1031 exchange. But honestly, the more I read, the more nervous I get. Everybody has a horror story about someone missing a deadline or forgetting a rule and ending up with a giant tax bill. Before I list my place, can you tell me (in plain English) what people mess up the most?
-Nervous (but trying) in North Carolina
Dear Nervous,
Oh, I’ve heard the horror stories too.
(And I’ve helped clean up more than a few of them.)
The truth is, 1031 exchanges aren’t hard, but they are extremely unforgiving if you assume “common sense” rules apply. The IRS plays by its own rulebook. And the people who get in trouble usually do so because nobody told them the real rules until it was too late.
Let me walk you through the mistakes I see almost every single spring, so you can avoid these missteps.
Mistake #1: Calling me AFTER you’ve signed a contract
This is the big one.
People call and say, “Hey John, I closed last Friday. Can you set up my 1031 exchange?”
I wish I could. Truly.
But once you’ve closed the relinquished property, the ship has usually sailed.
Here’s the real rule:
If you even think you want to do a 1031 exchange, call me before the sign goes in the yard.
It costs nothing, but it protects everything.
Mistake #2: Treating the 45-day period like a suggestion
Some people pace around their kitchen on day 44 like they’re waiting on exam results.
You get 45 days to pick your replacement properties.
It sounds generous.
It isn’t.
That clock moves faster than Amazon Prime.
Start looking early, even if you’re “just browsing.” Your stress level will thank you.
Mistake #3: Assuming your lender has the same sense of urgency you do
Some lenders can close in 30 days.
Some take…longer.
And sometimes it can be a lot longer.
And that’s how investors unintentionally run out the 180-day clock.
If you need financing at all, loop your lender in early.
“Hey, hypothetically, if I needed to close by June, could we do that?”
You’d be amazed how revealing that question is.
Mistake #4: Neglecting your paperwork until the last minute
People tend to hunt down their closing statements the way teenagers hunt their car keys.
But this stuff matters.
You need:
- the closing statement from when you bought it
- proof you rented it
- depreciation info
- improvement receipts
- entity docs if you used an LLC
You don’t need a color-coded binder…
…just a folder where it all lives and doesn’t get lost behind your tax returns from 2008.
Mistake #5: Thinking “like-kind” means “anything goes”
I wish it did.
I’d exchange my lawnmower for a beach house.
But no, the IRS has opinions.
Your property needs to be held for investment, not for beach vacations or family reunions or “just a few weekends.”
If you want to use it for fun later, we can talk strategy. Just don’t do it now.
Mistake #6: Forgetting about debt replacement
This one gets people every time.
You can’t just reinvest your cash; you also have to replace your debt.
If you pay off a $300,000 loan and only take on $150,000 in new debt, guess what?
The IRS taxes the difference.
It’s an easy fix, but you need to know about it before you start shopping.
Mistake #7: Looping in the CPA…in April
If your CPA hears about your 1031 exchange for the first time during tax season…
…they will not be amused.
They need to know early.
They’re the ones calculating basis, depreciation, and gain.
Bring them in from the beginning.
Think of me and your CPA as two people trying to keep you out of trouble. We work best as a team.
A Quick “Am I Ready for This?” Checklist
Here’s what I want you to be able to say “yes” to:
✔ I’ve talked to my QI
✔ I’ve talked to my CPA
✔ I know my deadlines
✔ I’ve gathered my documents
✔ I understand the debt I need to replace
✔ I’ve told my agent I’m doing an exchange
✔ I’ve started exploring replacement property options
If you can check most of these boxes, you’re in great shape.
Parting Thoughts
1031 exchanges aren’t scary once you understand the pressure points.
And you don’t need to memorize tax code; you just need to know what to do before you sell.
If you want me to walk through your specific situation, or if you’re still feeling a little nervous, call me anytime. I’m always happy to help someone get ahead of the curve.
— John Boyd
Founder & CEO, Banker Exchange