A Practical Guide for Investors, REALTORS®, Attorneys, and CPAs
Spring selling season is right around the corner, which means many investors are preparing to list properties, and many advisors are preparing to guide them. Before the rush begins, now is the perfect time to brush up on the most common 1031 exchange mistakes we see each year (and how to avoid them with a little planning).
Even experienced investors stumble into these pitfalls. The good news? They’re all avoidable.
Let’s walk through the biggest exchange mistakes and the simple steps that keep your transaction on track.
1. Waiting Too Long to Involve a Qualified Intermediary (QI)
This is hands-down the most common issue we see.
Ideally, a 1031 exchange should be set up before the seller signs a contract to sell their property.
If you wait until closing or even a few days before, it may be too late.
Why Waiting Too Long to Involve a QI Creates Problems:
- Exchange language isn’t added to the contract
- Timing to get exchange & closing documents becomes tight
- Closing agents get frustrated when closing documents change at the last minute
- Proceeds may accidentally go straight to the seller
How to Avoid It:
Call Banker Exchange before listing the property.
It’s simple, free, and ensures everything is lined up from day one.
2. Misunderstanding the Identification (ID) Rules
The 45-day identification period causes more panic than any other part of the exchange.
Three IRS identification rules exist and a lot of investors don’t know them:
- The 3-Property Rule (most common)
- The 200% Rule
- The 95% Rule
Common 1031 Exchange ID Mistakes:
- Waiting until the last few days to identify
- Identifying properties that aren’t truly feasible
- Forgetting to formally identify in writing through the QI
- Assuming the list can be changed at any time (it usually can’t)
- Not being specific enough with your ID, especially in construction exchanges
How to Avoid It:
- Start lining up options before you close on your sale.
- Use Banker Exchange as a resource. We help you understand which rule makes the most sense.
- Keep communication open between your agent, lender, and QI.
3. Missing the 45-day or 180-Day Deadline
The IRS does not offer extensions (except in rare federally declared disaster circumstances).
Common 1031 Exchange Timing Errors:
- Replacement closing delay causing exchange period to expire
- Miscounting the days
- Forgetting the 180-day deadline includes the closing of the new property
- Ignoring tax filing deadlines when they overlap the 180-day period
- Thinking you have 45 days to identify and 180 days to close. The total timeline is 180 days!
How to Avoid It:
- Put all deadlines into a shared calendar
- Confirm your CPA knows you’re in an exchange
- Coordinate with lenders early to avoid delayed closings
- Ask Banker Exchange to help you map out key dates
Timing is everything. A missed day could be a missed exchange.
4. Not Planning for Debt Replacement (aka Surprise "Boot")
Many investors focus on cash but forget about debt.
Common 1031 Exchange Financing Mistakes:
- Paying off a loan but not replacing that debt on the new property
- Accidentally receiving taxable “boot” due to financing gaps
- Assuming lenders can close by end of exchange period
- Trying to finance at the last minute
Rule of Thumb:
To fully defer taxes, you generally must:
✔ reinvest all net proceeds, and
✔ replace equal or greater debt
How to Avoid 1031 Exchange Financing Mistakes:
- Talk to your lender early
- Confirm financing timelines
- Review debt payoff amounts before listing
- Work with Banker Exchange on structuring options
5. Not Gathering the Right Documentation Early Enough
Missing documents can delay analysis, create confusion, and make tax reporting difficult.
Common Forgotten 1031 Exchange Items:
- Original purchase closing statement
- Proof of rental activity
- Depreciation schedules
- Improvement receipts
- Entity documents
How to Avoid It:
Gather these before listing, if you can, instead of right before closing.
6. Changing Ownership Structure Too Close to Closing
This includes:
- Adding/removing partners
- Shifting from individual ownership to an LLC
- Partnership “drop & swap” attempts at the last minute
These changes, while workable, can sometimes invalidate an exchange entirely.
How to Avoid It:
If your ownership structure needs to change, talk to Banker Exchange and your CPA well in advance.
7. Assuming Any Property Qualifies as "Like-Kind"
“Like-kind” is broad, but not limitless. Certain property types, personal residences, and excessive mixed-use can create issues.
How to Avoid 1031 Exchange Like-Kind Confusion:
- Confirm the property qualifies before listing
- Review special rules for vacation or second homes
- Hint: There are special considerations for properties used for personal and rental use.
- Ask Banker Exchange to help you interpret the IRS guidelines
8. Underestimating the Role of the CPA in a 1031 Exchange
Many investors assume the QI handles the tax work.
Not true! The CPA plays a major role.
CPAs help with:
- Depreciation recapture
- Adjusted basis
- Tax filing requirements
- Entity issues
- Installment sale considerations
How to Avoid It:
Loop in your CPA early, not just during tax season.
Final 1031 Exchange Mistake Thoughts
A 1031 exchange is a powerful tax-deferral tool but only when it’s done right. Most mistakes don’t come from complicated rules; they come from lack of preparation.
By understanding the common pitfalls and planning early, investors can save time, avoid stress, and maximize their tax savings.
If you’re planning to sell this spring — or advising clients who are — we’re here to help make sure your exchange is set up for success.