A 1031 Exchange is one of the most powerful strategies available to investment property owners because it allows for the deferral of capital gains taxes when selling and reinvesting in like-kind property. However, the exchange must follow strict IRS rules to keep those tax benefits intact.
Unfortunately, not all exchanges are executed correctly — and even minor missteps can invalidate the entire transaction, triggering an immediate tax liability. At Realized®, we help investors avoid these costly mistakes with personalized guidance and strategic planning.
Here's a breakdown of the most common ways a 1031 Exchange can be invalidated, and how to avoid them.
One of the easiest ways to invalidate an exchange is by missing a critical timeline:
These deadlines are not flexible. Even by a single day, missing either one will disqualify the exchange, and the IRS will treat your sale as fully taxable.
How to avoid it: Work with a Qualified Intermediary (QI) early and stay organized. At Realized®, we help clients plan their exchanges well in advance to ensure a smooth timeline.
In a valid 1031 Exchange, you cannot touch or control the proceeds from the sale of your relinquished property. If you receive the funds — even briefly — the IRS considers the sale complete and taxable.
How to avoid it: Always use a Qualified Intermediary to hold and transfer the funds between properties. Realized works with a network of trusted QIs to facilitate compliant exchanges.
To entirely defer capital gains taxes, you must:
If you fall short on any of these, the difference is considered "boot" and is subject to taxation.
How to avoid it: Structure your replacement property portfolio carefully. Our team at Realized® uses custom investment plans to help investors reinvest fully and strategically.
To qualify for a 1031 Exchange, the relinquished and replacement properties must be "like-kind," meaning they're both for investment or business use.
Examples of disqualifying assets include:
How to avoid it: Ensure your replacement property — including DSTs or fractional real estate interests — meets the IRS's like-kind standards. Realized specializes in DSTs that are structured for full 1031 compliance.
If the IRS determines your intent wasn't to hold the property for investment (for example, if you move into it shortly after purchase), the exchange can be challenged — even years later.
How to avoid it: Document your investment intent clearly and consult your tax advisor before changing the use of a replacement property.
The rules may seem strict, but with the right team and planning, a 1031 Exchange can be a powerful way to defer taxes and preserve wealth.
Are you thinking about a 1031 Exchange?
Talk to Realized® about building a compliant, customized investment strategy that avoids common pitfalls — and keeps your capital working for you.