Many failed 1031 exchanges don’t happen because someone was trying to bend the rules. They occur because of poor advice, inadequate planning, or simple assumptions that proved to be incorrect.
A 1031 exchange can be a powerful way to defer capital gains taxes when selling investment real estate. But it’s also one of the most misunderstood tax strategies — and the rules are far less forgiving than most people realize.
Many failed 1031 exchanges don’t happen because someone was trying to bend the rules. They occur because of poor advice, inadequate planning, or simple assumptions that proved to be incorrect.
Here are five common mistakes that can instantly disqualify a 1031 exchange, explained clearly so you know what to avoid before it’s too late.
This is the number one deal killer.
A 1031 exchange must be structured before the sale closes. That means the proper exchange agreement must be in place and a Qualified Intermediary (QI) must be engaged ahead of time.
Once the sale closes and the proceeds are available to you, the IRS generally considers the transaction complete — and taxable. At that point, you can’t retroactively turn it into a 1031 exchange.
Bottom line:
If the property is sold first and the exchange wasn’t set up in advance, the opportunity is usually gone.
Even if you plan to reinvest every dollar, touching the money can disqualify the exchange.
The IRS applies a rule called constructive receipt, which means you don’t actually have to take the funds for the exchange to fail — you just have to have access to them.
This includes situations where:
That’s why a Qualified Intermediary is required. The QI holds the proceeds so you never receive or control them.
Bottom line:
If you can access the money, even briefly, the exchange may be invalid.
A valid 1031 exchange is accompanied by strict, non-negotiable deadlines.
From the day your property sells, you have 45 calendar days to formally identify potential replacement properties. Miss that deadline — even by one day — and the exchange typically fails.
There are no extensions for:
The IRS does not offer flexibility here.
Bottom line:
If replacement properties aren’t identified within 45 days, the exchange is disqualified.
Not all real estate qualifies for a 1031 exchange.
Both the property you sell and the property you buy must be held for investment or business use. Personal-use property does not qualify.
Common issues include:
Even if the property is rented occasionally, excessive personal use can jeopardize the exchange.
Bottom line:
If the property isn’t clearly held for investment or business purposes, it doesn’t qualify.
A 1031 exchange is not something that can be corrected after closing.
Once the sale is complete without the proper structure, documentation, and safeguards in place, the IRS generally considers the transaction final. Intentions don’t override technical requirements.
This is where many people get tripped up by casual advice like:
Unfortunately, that’s rarely true.
Bottom line:
1031 exchanges reward planning — not improvising.
A 1031 exchange can be an excellent tax-deferral strategy, but it’s also unforgiving. Selling too soon, touching the funds, missing deadlines, or misunderstanding what qualifies can instantly disqualify the exchange.
If a sale is on the horizon, the most important step isn’t finding replacement property — it’s getting the right structure in place before closing.
When it comes to 1031 exchanges, timing isn’t just important. It’s everything.
