Common 1031 Pitfalls to Avoid

As we approach the end of the year, it is a good time to review some of the common pitfalls that we see as a Qualified Intermediary. We recommend that you avoid these common mistakes.

1. Don’t forget to set up your 1031 Exchange before closing
You must set up your 1031 Exchange with Security 1st Exchange as your Qualified Intermediary before you close on the property that you are selling (or buying if you are performing a Reverse Exchange). The tax code is very clear, if you close on your sale without having a 1031 set up, you cannot go back and set it up afterwards. Please try to give us a few days to get things ready before the sale closes, but in many situations, we can even set up your 1031 Exchange on the same day of your closing.

2. Missing your 45 day identification date
From the date of the closing of your Relinquished Property, you have 45 calendar days to identify your Replacement Property with your Qualified Intermediary. These 45 days are not business days, but calendar days (including weekends and holidays). There are no extensions to the 45 day identification period, so make sure you identify your replacement property(ies) in writing on the Qualified Intermediary’s identification form and submit that form to the Qualified Intermediary before midnight on the 45th day.

3. Not purchasing replacement property equal or greater than the relinquished property
Most exchangors doing a 1031 Exchange are looking to defer all of their taxes. But if you do not purchase property equal or greater than the property that was relinquished, there could be a taxable liability. That may still benefit you by saving some taxes.

This should always be discussed with a tax professional to make sure that the transaction makes fiscal sense if you are purchasing less than what you sold.