Starting Too Late
Selling the property before arranging the exchange can leave few or no options.
Purvis & Company Exchange
Common 1031 Exchange Mistakes and How to Avoid Them
A 1031 exchange can be a useful way to defer taxes when selling investment property. But mistakes with timing, ownership, property use, or sale proceeds can affect your exchange.
Knowing what to watch for before closing can help you avoid costly surprises later.
The best time to ask about a 1031 exchange is before the property you're selling closes.
Most Exchange Problems Start Before Closing
Many of the most serious 1031 exchange problems can be avoided with proper planning.
Missing a Deadline
Waiting too long to identify or buy replacement property can cause the exchange to fail.
Assuming a Home Qualifies
Not every rental, vacation property, or former primary residence qualifies for an exchange.
10 Mistakes to Avoid With a 1031 Exchange
These are the issues we encourage investors to discuss with their exchange team and tax advisor before closing.
Waiting Until After the Sale
In a traditional forward exchange, you generally cannot complete an ordinary property sale, take the proceeds, and decide afterward to turn it into a 1031 exchange.
What to do: Contact us before closing so the proper exchange agreements and instructions can be arranged.
Receiving the Sale Proceeds
Having direct access to exchange funds can prevent a qualifying delayed exchange, even if you plan to reinvest the money later.
What to do: Have the Qualified Intermediary coordinate the funds according to the exchange agreement.
Missing the 45-Day Deadline
You generally must identify replacement property within 45 calendar days after the relinquished property closes.
What to do: Start looking for replacement property before selling, and submit the identification in the required format on time.
Missing the Purchase Deadline
Identifying a property is not enough. You must also acquire qualifying replacement property within the applicable exchange period.
What to do: Evaluate financing, inspections, title, and closing timelines early. Don't assume your full 180 days will always be available.
Buying Property for Personal Use
A primary home or personal vacation property generally does not qualify. Calling a house an investment doesn't automatically make it one.
What to do: Have your CPA review the actual rental, ownership, and personal-use history before proceeding.
Changing the Taxpayer
Selling as one taxpayer and purchasing through a different taxpayer can cause problems. This often comes up with LLCs, trusts, spouses, and partnerships.
What to do: Review the tax ownership of both properties before changing names or entities.
Keeping More Money Than Expected
Cash received, certain credits, or other value not reinvested may result in taxable gain, commonly called "boot."
What to do: Review the projected settlement statements and reinvestment plan with your CPA and exchange team.
Overlooking Existing Debt
Relief from debt on your old property may affect the tax result. Replacement debt or additional cash invested can also matter; it is not simply a comparison of loan balances.
What to do: Include loan balances and proposed financing in your exchange planning before signing contracts.
Ignoring Related-Party Rules
Transactions with family members or related businesses may have additional restrictions, even if a Qualified Intermediary is used.
What to do: Tell your CPA and exchange team about any family or business relationship between the parties.
Not Planning for the Tax Return Date
If your property sale occurs late in the year, the tax return filing deadline can shorten the usual 180-day exchange period.
What to do: Ask your CPA early whether a tax return extension will be needed to preserve the permitted exchange period.
Additional Safeguards
Two More Rules That Can Derail an Exchange
Meeting the deadlines is necessary, but the replacement property must also be properly identified and the exchange must be structured with an eligible intermediary.
Follow the Written Identification Rules
A replacement-property identification generally must be in writing, signed by the taxpayer, and delivered by the 45-day deadline to the Qualified Intermediary or another permitted recipient. Telling your agent which property you prefer is not enough.
Know the limits: Common identification methods include the three-property rule and the 200% rule. Additional rules may apply if you identify properties beyond those limits.
Use an Eligible Qualified Intermediary
Your own agent, attorney, accountant, real estate broker, or certain related persons may be disqualified from acting as Qualified Intermediary based on prior relationships and IRS rules. A professional's familiarity with your transaction does not automatically make that person eligible.
What to do: Arrange the QI before the sale, confirm its eligibility, and make sure exchange proceeds are controlled under appropriate written exchange agreements.
Identification and intermediary eligibility can be fact-specific. Have the QI and your independent tax advisors review the proposed arrangement.
Two Deadlines You Should Never Ignore
In a typical forward exchange, the clock generally begins when your original property closes.
Identify Replacement Property
Properly identify potential replacement property within 45 calendar days after the sale. There are specific limits and documentation rules.
Complete the Exchange
Generally, complete the replacement purchase by day 180, or the applicable tax return due date, including extensions, whichever comes first.
These deadlines overlap. They are not 45 days plus another 180 days. Limited relief may apply in certain IRS-designated disaster situations.
Important for Homeowners and Seasonal Residents
A Home Isn't Automatically an Investment Property
This comes up often with seasonal homes, vacation properties, and homes in communities such as The Villages, Florida.
Just because a home increased in value doesn't mean it qualifies for a 1031 exchange. Generally, the property must be held for investment or business use, not primarily as your personal residence.
Renting a home occasionally also doesn't automatically turn it into qualifying investment property. The rental history, personal use, and the owner's intentions all matter.
The IRS provides a specific safe harbor for certain homes that are rented and also used personally. It includes ownership, rental, and personal-use rules.
Homeowners selling a primary residence should also ask their CPA about the separate home-sale tax exclusion under Section 121.
A Quick Checklist Before You Close
A little preparation before the first closing can prevent problems that are difficult to fix later.
Exchange Planning
- Confirm the property is held for qualifying purposes.
- Talk with your CPA about the expected tax result.
- Contact the exchange team before closing.
- Discuss the property you want to buy next.
- Review how much you plan to reinvest.
- Review your existing debt and replacement financing.
Closing Preparation
- Provide your signed sale contract.
- Share the anticipated closing date.
- Confirm the taxpayer and ownership details.
- Let the closing agent know the transaction involves an exchange.
- Coordinate the exchange documents and proceeds instructions.
- Calendar your identification and closing deadlines.
Sensitive tax identification and banking information should only be submitted using an approved secure method.
Frequently Asked Questions About Exchange Mistakes
What is the biggest mistake in a 1031 exchange?
A major mistake is waiting until after the property sale closes to arrange the exchange. For a typical forward exchange, the Qualified Intermediary arrangement should be in place before closing.
Can I start a 1031 exchange after selling my property?
If you've already completed an ordinary sale and received the proceeds, a typical delayed exchange generally cannot be created afterward.
What if I cannot find a replacement property within 45 days?
If you fail to identify qualifying property by the deadline, your delayed exchange may fail. Limited relief exists in certain qualifying circumstances, but should never be assumed.
Can I use a 1031 exchange when selling my home in The Villages?
Generally, your personal residence does not qualify. A genuine investment or rental property may qualify, depending on its use and ownership history. Your CPA should compare any possible 1031 treatment with the separate primary-residence tax exclusion.
Is renting a house for 14 days enough to qualify?
Not by itself. The IRS vacation-home safe harbor also involves a 24-month ownership period, rental requirements in each 12-month period, and limits on personal use. Meeting a rental-day minimum alone does not establish exchange eligibility.
Can I live in the replacement property after buying it?
A property acquired for personal use generally does not qualify as 1031 replacement property. Changes from investment use to personal use need careful review. Certain dwelling-unit safe-harbor rules consider use during the 24 months after acquisition.
Will my entire exchange fail if I keep some cash?
Not necessarily. A partial exchange may still be possible, but cash or other value received may result in taxable gain. The actual tax result depends on the transaction.
Can I change the name or LLC buying the replacement property?
Sometimes, but the same taxpayer generally must remain involved. Certain disregarded LLCs may be treated as the same taxpayer. Discuss any proposed ownership change with your CPA before proceeding.
Who handles the exchange proceeds?
In a qualifying delayed exchange, proceeds are handled under the written Qualified Intermediary agreement rather than being made available to the taxpayer. Purvis & Company 1031, LLC, an Accruit-owned entity, serves as QI under its exchange agreements.
Who can answer questions before my closing?
Contact Purvis & Company Exchange at exchange@purvisco.com, complete the online exchange inquiry, or schedule a consultation. Your CPA and legal advisors should address tax eligibility and legal consequences.
Official IRS Resources
For the underlying federal guidance, review these IRS materials with your tax advisor. They do not replace transaction-specific advice.
IRS Topic 420
Overview of like-kind exchanges of real property.
Revenue Procedure 2008-16
Safe-harbor guidance for certain dwelling units held for investment.
Avoid Surprises. Plan Your Exchange Early.
Selling a rental, commercial property, investment land, or another qualifying property? Start the exchange conversation before closing. We can help coordinate the next steps.
Questions? Email exchange@purvisco.com
Qualified Intermediary services are provided by Purvis & Company 1031, LLC, a wholly owned subsidiary of Accruit LLC. Purvis & Company Exchange is the customer-facing exchange service and is not itself the Qualified Intermediary. Purvis & Company Title separately provides title, escrow, and settlement coordination; it does not act as the QI. Information on this page is educational and does not constitute legal, tax, or investment advice. Exchange eligibility, deadlines, and tax results depend on each transaction. Consult independent tax and legal advisors.
