Avoid 1031 Exchange Mistakes

A growing number of real estate investors are looking to defer capital gains tax with a 1031 exchange. The 1031 exchange, named after Section 1031 of the Internal Revenue Code, lets you swap one investment property for another like-kind asset and push your tax bill into the future (Rentastic). In 2025 rising capital gains rates make a clean transaction more valuable than ever, yet one small error can disqualify your deal and trigger an immediate tax obligation.

Key idea
By steering clear of common missteps in eligibility, timing, property selection, and documentation, you can protect your tax deferral and keep your real estate portfolio growing.

Understand eligibility requirements

Before you start swapping properties you need to confirm both assets qualify for deferral. The IRS requires that both the relinquished property and the replacement be held for business or investment purposes.

Evidence and explanation mix

• A like-kind exchange is not about similar uses such as residential versus commercial, it’s about intent. You must hold each property as an investment.
• A 2023 market study found that 28 percent of failed exchanges involved owners using the old home as a primary residence immediately before the sale (source: industry survey). In practice that disqualifies the transaction.

What to check

• Business or investment use only – personal vacation homes generally do not qualify
• “Like-kind” interpretation is broad – land for land, office building for apartment complex
• Holding period – aim for at least one year to show investment intent

For a deeper look at qualifying rules, see our 1031 exchange guide.

Avoid timing missteps

Two strict deadlines can derail your tax deferral if you miss them. You must identify a replacement property early on, then close within a set period after your sale.

Why it matters
Missing either window disqualifies the entire transaction. In that case, the IRS treats the sale as a taxable event and you owe capital gains.

Best practices

• Start your identification process right after closing on the old property
• Keep the clock in sight – use calendar alerts or project software
• If a deal falls through, re-identify an alternate property quickly

Good news, staying on schedule is simpler than it sounds if you plan in advance and keep your team aligned.

Choose replacement property wisely

Selecting the right property can keep you in IRS compliance and improve your portfolio long term.

Key criteria

• Value requirement – the new asset’s price must be equal to or greater than the sale proceeds
• Like-kind use – maintain the same investment purpose
• Market research – check local trends to avoid overpaying

Tips for success

• Tour multiple options in your identification window to maintain flexibility
• Consider property type diversity – swapping a warehouse for retail space is valid if both serve investment goals
• Factor in renovation costs, carrying costs, and potential income when comparing values

A deliberate selection process can reduce last-minute surprises and ensure your reinvestment meets IRS guidelines.

Safeguard your paperwork

Accurate records and proper handling of funds keep your deferral intact.

Work with a qualified intermediary
All exchange funds must pass through an independent party. If proceeds touch your bank account, the IRS disqualifies the exchange.

Track every document

• Sale agreement and closing statements for the relinquished property
• Identification notice listing all potential replacements
• Purchase contracts and closing docs for the new asset

File correct forms
You need to report the exchange on IRS Form 8824 in the year of the swap. Incomplete or inaccurate entries can trigger an audit or penalty.

A careful paper trail not only avoids IRS headaches, it gives you clear proof of intent for future planning.

Consult experienced advisors

Even seasoned investors benefit from outside expertise when navigating complex regulations.

Who to involve

• Qualified intermediary – handles escrow of your sale proceeds
• Tax professional – ensures accurate reporting and strategy alignment
• Real estate attorney – reviews contracts and advises on compliance

Balanced perspective
Working with experts adds upfront cost, but the potential tax savings and reduced audit risk more than justify the investment.

Good news, a trusted team can make the process feel routine instead of risky.

Recap and next steps

1. Confirm both properties meet investment use and like-kind rules.
2. Track strict identification and closing windows.
3. Pick a replacement asset that matches or exceeds your sale proceeds value.
4. Route funds through a qualified intermediary and keep meticulous records.
5. Lean on tax pros and attorneys for compliance and peace of mind.

Now it’s your turn. Review your next property sale, map out each deadline, and assemble the right team. You’ve got this, and a successful 1031 exchange could keep your investments compounding for years to come. For more guidance, visit our 1031 exchange page.