Real Estate Tax Calc
Deadline and identification errors
Missing the 45-day identification deadline. From the date you close the relinquished property, you have exactly 45 days to identify the replacement property in writing to your qualified intermediary. There is no extension except in federally declared disasters. The most common failure: underestimating how hard it is to find suitable property in 45 days in a tight market.
Identifying too many properties without the 200% rule. You may identify up to three properties of any value (the 3-property rule). If you identify more than three, you must not close on more than 200% of the relinquished property's FMV (the 200% rule), or you must close on at least 95% of all identified properties. Violating the limits causes all identified properties to fail.
Missing the 180-day closing deadline. The 180-day period runs from the closing of the relinquished property (not from the 45-day date). If your tax return due date falls earlier, the deadline is the earlier of 180 days or the due date of your return (including extensions). Filing an extension buys you the full 180 days.
Constructive receipt and QI errors
Receiving the sale proceeds. If the proceeds from the relinquished property ever touch your hands — even briefly — you have constructively received the cash, and the exchange fails. The money must flow directly to a qualified intermediary at closing. Do not instruct the title company to send funds anywhere other than the QI.
Using an ineligible QI. The qualified intermediary cannot be your agent — meaning your attorney, CPA, real estate broker, employee, or someone who has acted in that capacity in the prior two years. Using a disqualified person as a QI destroys the exchange.
Paying personal expenses from escrow. Using exchange funds for anything other than the replacement property acquisition (even closing costs not directly related to the purchase) can constitute boot.
Boot and basis errors
Receiving net boot. If you sell for more than you pay for the replacement property, or if you receive cash (mortgage relief, unused proceeds), the excess is taxable boot. Boot does not disqualify the exchange — it simply creates a partially taxable transaction — but investors sometimes receive boot without realizing it.
Not replacing debt. Mortgage relief (paying off more debt than you take on with the new property) is treated as boot unless offset by additional cash invested. If your relinquished property had a $400,000 mortgage and you buy a replacement property with only $300,000 in debt, the $100,000 difference is boot unless you add $100,000 in cash.
Buying a lower-value replacement. The full tax deferral requires reinvesting at least the amount realized (net proceeds plus debt relief) in the replacement property. Buying down creates taxable boot equal to the shortfall.
A worked example: the partial-boot trap
Suppose you sell a rental for $600,000 net, with a $250,000 mortgage paid off at closing, leaving $350,000 of equity that goes to your qualified intermediary. To fully defer, you must buy replacement property worth at least $600,000 and take on at least $250,000 of new debt (or add cash to make up any debt shortfall). If you instead buy a $520,000 replacement with a $200,000 mortgage, you have two problems: $80,000 of value not reinvested and $50,000 of debt relief not replaced.
The cash boot from the unspent proceeds is the larger exposure here, and the $50,000 of unreplaced debt is mortgage boot (which you could offset by adding $50,000 of cash to the purchase). Boot does not void the exchange — it simply makes that slice taxable, and the boot is taxed first as depreciation recapture, then as capital gain. Running these numbers before you sign is the single best way to avoid an unexpected bill.
Related-party exchange traps
Exchanging with a related party (as defined in Sections 267(b) and 707(b) — family members, controlled entities) triggers a special two-year holding rule under Section 1031(f). If either party disposes of the property received within two years, the original deferral is retroactively lost and the gain becomes taxable. The rule exists to stop families from shifting basis to cash out low-basis property tax-free.
Buying replacement property from a related party through a qualified intermediary is especially scrutinized; the IRS has challenged these as disguised cash-outs. If a related party is on either side of the deal, get professional advice before closing — this is one of the most litigated areas of Section 1031.
Vesting and 'same taxpayer' errors
The taxpayer who sells the relinquished property must be the same taxpayer who acquires the replacement property. A common mistake is selling in the name of an individual but taking title to the replacement in a new entity (or vice versa), which breaks the exchange. A single-member LLC treated as a disregarded entity is the same taxpayer as its owner, so that works; a multi-member LLC, partnership, or corporation is a different taxpayer and does not.
This trips up investors who form a new entity for the replacement property for liability reasons. Plan the vesting before closing: if you need an LLC to hold the replacement, use a disregarded single-member LLC owned by the same taxpayer that sold, and get advice before layering in additional members.
Mishandling seller financing and non-cash proceeds
If you carry back a note (seller financing) on the relinquished property, that note is proceeds you do not receive in cash. Unless the note itself is assigned into the exchange and applied toward the replacement purchase, it is generally treated as installment-method boot as principal is collected. Investors sometimes overlook this and create taxable boot spread across the note's payments.
Most ordinary closing costs paid from exchange funds are fine (commissions, title, escrow, recording). But paying non-exchange expenses from the proceeds — prorated property taxes credited to the buyer, or paying off unrelated personal debt — can generate boot. Review the settlement statement with your intermediary so nothing leaks out of the exchange account.
How to avoid these mistakes
Engage a qualified intermediary before you close the sale — not after. The QI must be in place and the exchange documents signed before the relinquished property closes, or the proceeds are constructively received and the exchange cannot be created retroactively. Choose an established QI with fidelity bonding and segregated accounts, since the QI holds your money between closings.
File a tax extension if your return would otherwise be due before day 180, so you preserve the full closing window. Identify a backup replacement within the 45 days, staying inside the 3-property or 200% limits. And model the reinvestment math — both value and debt — before you list, so you know exactly how much you must buy and borrow to achieve full deferral.
Reporting the exchange on Form 8824
Even a flawless exchange must be reported. Form 8824 is filed with your tax return for the year the relinquished property was transferred, reporting the like-kind properties, the key dates, any boot received, the realized and recognized gain, and the basis of the replacement property. Failing to file it, or filing it with errors, can draw IRS scrutiny even when the underlying exchange qualifies.
Your carryover basis in the replacement property is one of the most-missed figures: it is generally the basis of the relinquished property, adjusted for additional cash paid, boot received, and gain recognized. Because depreciation on the replacement continues on that carried-over basis — with separate treatment for any excess basis from additional investment — keeping the Form 8824 and the basis computation in your permanent records is essential for correctly depreciating the new property and computing gain when you eventually sell.
Frequently asked questions
What is the most common reason a 1031 exchange fails?
Missing the 45-day identification deadline or allowing the sale proceeds to pass through the seller's hands before reaching the qualified intermediary. Both failures are fatal to the exchange.
Can I get a deadline extension on a 1031 exchange?
Generally no. Extensions are available only in federally declared disasters under Rev. Proc. 2018-58 and similar guidance. The only other way to get more time is to file a tax return extension, which preserves the full 180-day closing window.
What happens if my 1031 exchange partially fails?
A partial exchange is possible: the portion of gain attributable to boot received is taxable; the rest is deferred. The exchange does not fail entirely just because you receive some boot.
Can I do a 1031 exchange with a family member?
Yes, but Section 1031(f) imposes a two-year holding requirement: if either related party sells the exchanged property within two years, the deferral is retroactively lost. Buying replacement property from a related party through a qualified intermediary is heavily scrutinized and often disallowed.
Can I sell as an individual and buy the replacement in an LLC?
Only if the LLC is a single-member LLC that is disregarded for tax purposes and owned by the same taxpayer who sold. A multi-member LLC, partnership, or corporation is a different taxpayer, which breaks the same-taxpayer requirement and disqualifies the exchange.
What happens to seller financing in a 1031 exchange?
A note you carry back is not cash you can reinvest. Unless the note is assigned into the exchange and applied to the replacement purchase, it is generally treated as installment-method boot, taxed as the principal payments are received.
How far in advance should I set up a 1031 exchange?
Engage a qualified intermediary and sign the exchange agreement before the relinquished property closes. Once you have received the proceeds it is too late — constructive receipt has occurred and the exchange cannot be created retroactively.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.