Common 1031 Exchange Mistakes (That Cost Investors the Most)

In the mid­dle of a dis­cus­sion with an investor, we often hear the com­ment “I wish I would have known (fill in the blank) before they moved for­ward. There are many aspects of the §1031 tax deferred exchange that may go wrong.

Feb­ru­ary 20, 2026

By Al DiNi­co­la, AIF®
Adinicola@namcoa.com
Pri­vate Fund Advisor/DST 1031 Spe­cial­ist
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

We have writ­ten many posts on indi­vid­ual risks. How­ev­er, this is an attempt to present a clear, investor-focused guide to the most com­mon 1031 exchange mis­takes and the best con­tin­gency plan­ning strate­gies pro­fes­sion­als use to pre­vent a failed exchange.

1. Miss­ing the 45-Day Iden­ti­fi­ca­tion Dead­line

This may be one of the most fre­quent mis­takes. There may be many rea­sons for this includ­ing wait­ing for the “per­fect” deal, not iden­ti­fy­ing back­ups, or assum­ing exten­sions exist. Investor hes­i­ta­tion may be as a result of first-time investors nego­ti­at­ing for a spe­cif­ic prop­er­ty. The rela­tion­ships with oth­er advi­sors on their team, if they have a team, may also cre­ate con­flict and delay. The Inter­nal Rev­enue Ser­vice allows no grace peri­od.

2. Improp­er Iden­ti­fi­ca­tion

Once you decide to enter into a 1031 exchange there are iden­ti­fi­ca­tion require­ments. Vague descrip­tions (“a duplex in Mia­mi, FL”) is a very com­mon poor and insuf­fi­cient descrip­tion. Iden­ti­fy­ing the wrong par­ty (bro­ker instead of QI) to hold the funds. Chang­ing prop­er­ties after Day 45 can­not hap­pen. Once Day 45 pass­es, your list is locked. One of our past arti­cles focused on what hap­pens if you miss the 45-day notice. (Click here)

3. Receiv­ing or Con­trol­ling the Sale Pro­ceeds

Con­struc­tive receipt is a term you may hear from a num­ber of peo­ple. It does not mean that you have the mon­ey at your house or in your per­son­al bank account. Funds wired to your account, even briefly will can­cel the exchange. Sale pro­ceeds held by your attor­ney or bro­ker are con­sid­ered con­struc­tive receipt and will ter­mi­nate the exchange. The rela­tion­ship with the Qual­i­fied Inter­me­di­ary (QI) is very impor­tant and improp­er escrow set­up may also kill the exchange imme­di­ate­ly. Any con­struc­tive receipt kills the exchange imme­di­ate­ly.

4. Buy­ing Prop­er­ty That Is Not Like-Kind

The illu­sive term “like kind” may be con­fus­ing. Investors can­not use pri­ma­ry res­i­dences, sec­ond homes for per­son­al use, fix-and-flip inven­to­ry or inter­ests that don’t qual­i­fy. That being said, there may be long range strate­gies (over a peri­od of years) where an investor may end up mov­ing into an exchange prop­er­ty after a num­ber of years and claim as a pri­ma­ry res­i­dence. How­ev­er, that takes long term plan­ning. Like-kind must be invest­ment or busi­ness real estate. Remem­ber it is real estate for real estate. You can exchange farm­land for income pro­duc­ing mul­ti­fam­i­ly apart­ments.

5. Trad­ing Down (Boot Mis­takes)

There may be rea­sons for doing a par­tial exchange and retain­ing part of the pro­ceeds that are sub­ject to cap­i­tal gains. This is called “boot”. How­ev­er, occa­sion­al­ly an investor will buy a less expen­sive prop­er­ty (poten­tial­ly nego­ti­at­ed a bet­ter price) and will pay cap­i­tal gains on the cash not used or debt not replaced. The low­er debt replace­ment is an item that may be over­looked. The debt needs to be replaced with match­ing debt or addi­tion­al cash. As to the first rea­son stat­ed above, tak­ing cash out is always an investor option. This results in par­tial tax­a­tion, even if the exchange oth­er­wise suc­ceeds.

6. Financ­ing Delays

This may be one of the most time sen­si­tive items fac­ing an investor. The rise in inter­est rates as well as a more con­ser­v­a­tive under­writ­ing by lenders may cause delays. Lenders miss­ing dead­lines under nor­mal cir­cum­stances is com­mon. This may be caused by appraisal issues or even loan terms chang­ing late in the process. If you are wait­ing for the loan approval dur­ing the short 45-day win­dow, there may be a lot of pres­sure on the investor on which prop­er­ty to include on the iden­ti­fi­ca­tion list.  Financ­ing prob­lems are one of the top rea­sons exchanges fail after Day 45.

7. Wait­ing Until After Clos­ing to Plan

When an investor con­tacts us and stat­ed their prop­er­ty is under con­tract and they want to do a 1031 exchange we do have a spe­cif­ic set of ques­tions. First of all is “do you have a QI”? if the answer is “NO” that is an issue. Not hav­ing a QI select­ed in advance is solv­able but stress­ful espe­cial­ly if the clos­ing is hap­pen­ing in a mat­ter of days. Next issue may be when an investor calls us dur­ing their 45-day iden­ti­fi­ca­tion peri­od. This may mean no replace­ment options lined up. The clock starts the day after clos­ing, whether you’re ready or not.

Con­tin­gency Plan­ning Strate­gies (How Pros Pro­tect 1031 Exchanges)

Now that we have iden­ti­fied some of the com­mon mis­takes, we may offer a few sug­ges­tions on how to avoid.  

Iden­ti­fy Back­up Prop­er­ties (Rule of 3)

There are three dif­fer­ent prop­er­ty iden­ti­fi­ca­tion rules. What the investor may want to do is to iden­ti­fy two to three prop­er­ties not just one. Some investors will use dif­fer­ent asset types or loca­tions when the iden­ti­fy a prop­er­ty. Investors may want to assume at least one deal will fall through. This may be due to a num­ber of rea­sons, one of which is that the nego­ti­a­tions for buy­ing the prop­er­ty may not be suc­cess­ful. In addi­tion, you may have issues with inspec­tions or con­tin­gen­cies for buy­ing a spe­cif­ic prop­er­ty and elim­i­nate that prop­er­ty dur­ing the 45 days. Iden­ti­fy­ing prop­er­ties or poten­tial prop­er­ties may be the sin­gle most impor­tant risk reduc­tion strat­e­gy.

Do you real­ly need a 1031 exchange?

Occa­sion­al­ly we will speak with an investor who will call us regard­ing the terms of the prop­er­ty that they’re sell­ing. One of our first ques­tions regard­ing the sale of the prop­er­ty has to do with under­stand­ing what the cap­i­tal gains impli­ca­tions and rel­a­tive tax­es that may be due on the sale. An investor’s CPA or accoun­tant should be able to advise them on what the tax impli­ca­tions may be. While we do have tools on our web­site to give a thumb­nail on poten­tial tax impli­ca­tions on the sale of a prop­er­ty, we are not pro­vid­ing tax advice. On some occa­sions cap­i­tal gains on the prop­er­ty may not war­rant and investor to enter into an exchange. Some investors may be bet­ter off sim­ply pay­ing the cap­i­tal gains tax­es due on the sale. What we also encounter is an investor who has recent­ly inher­it­ed a prop­er­ty from a fam­i­ly mem­ber and wants to enter into a 1031 exchange with­out under­stand­ing the step up in bases that they are pro­vid­ed that may elim­i­nate cap­i­tal gains tax­es on the prop­er­ty.

Use DSTs as a Safe­ty Net

Accred­it­ed investors may have an advan­tage uti­liz­ing Delaware statu­to­ry trust DSTs as replace­ment prop­er­ties. DSTs may become back­up options, par­tial replace­ments or even han­dle left­over cash/boot to elim­i­nate cap­i­tal gains impli­ca­tions. DST’s have also become emer­gency replace­ment when an investor is close to the 45-day iden­ti­fi­ca­tion dead­line.

The ben­e­fit of using the DST is that it enables an investor to pre iden­ti­fy prop­er­ties. There is an extreme­ly high prob­a­bil­i­ty that clos­ing will take place as well as an expe­dit­ed clos­ing process enabling will­ing investors to receive poten­tial dis­tri­b­u­tions soon­er. DSTs per­mit frac­tion­al invest­ing into high qual­i­ty assets that investors would oth­er­wise be pro­hib­it­ed from invest­ing. For investors that need debt replace­ment there’s no financ­ing risk because DSTs are prepack­aged with non-recourse debt. That means the investor does not need to apply for financ­ing and will be assigned a loan to val­ue based on their needs in the struc­ture of the DST.

Start Replace­ment Search Before Sell­ing

When investors call us and state, they are think­ing about sell­ing their prop­er­ty they may have a greater per­cent­age of suc­cess than investors who think of a 1031 exchange in the last minute. We always sug­gest investors to line up prop­er­ties before they even list the prop­er­ty that they’re going to sell. If they need to replace debt on the prop­er­ty that they’re sell­ing, we urge investors to get pre­qual­i­fied with their lender of choice in advance. Lenders may require per­son­al guar­an­tees for a new mort­gage on the replace­ment prop­er­ty. If investors uti­lize the DST route, we will pro­vide the pri­vate place­ment mem­o­ran­dums ear­ly enough so the investors can review. A 10/31 exchange should be planned months not weeks ahead.

Over-Iden­ti­fy (With­in IRS Rules)

The IRS pro­vides three dif­fer­ent rules when iden­ti­fy­ing a prop­er­ty. Investors should strate­gi­cal­ly review which prop­er­ty iden­ti­fi­ca­tion rules will pro­vide them with the most options. Under­stand­ing these options and uti­liz­ing more options can reduce dead­line pres­sures.

Coor­di­nate Your Team Ear­ly

A strong exchange team includes A qual­i­fied inter­me­di­ary or QI. A QI is need­ed to hold the funds that will qual­i­fy for the entire exchange. Investors should con­sult their CPA or tax advi­sor as to the over­all impli­ca­tion of the sale of the invest­ment prop­er­ty as we stat­ed ear­li­er. Con­sul­ta­tion with a real estate bro­ker if you are going to use their ser­vices to list the prop­er­ty. If you are obtain­ing a replace­ment loan inter­act­ing with the lender is strong­ly encour­aged so you know what the lim­i­ta­tions are for the replace­ment loan. Remem­ber you do not have to replace the loan if you replace the loan amount with addi­tion­al cash. Most fail­ures hap­pen due to poor com­mu­ni­ca­tion, not bad intent.

File a Tax Exten­sion Auto­mat­i­cal­ly

One of the fine print issues that may trip up an investor up has to do with the require­ment to close on the replace­ment prop­er­ty pri­or to 180 days from the sale of their relin­quished prop­er­ties. This may be short­ened due to when the relin­quished prop­er­ty is sold. You have 180 days from the time the prop­er­ty is sold or when tax fil­ing day comes up. So, fil­ing a tax exten­sion auto­mat­i­cal­ly will extend or pre­serve the 180 days. This is the best prac­tice to pre­vent acci­den­tal ear­ly dead­lines.

What Smart Investors Assume Going In

Some investors may sub­scribe to Mur­phy’s law. Any­thing that can go wrong will go wrong. One deal will fall apart because financ­ing will take longer than expect­ed. The IRS will not be flex­i­ble. Back­up plans are manda­to­ry.

Bot­tom Line

Most 1031 fail­ures are pre­ventable. Suc­cess­ful exchanges are built on redun­dan­cy, ear­ly plan­ning, and con­ser­v­a­tive assump­tions.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC, 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035.  MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.