Learn the Most Common 1031 Exchange Mistakes and How to Avoid Them | DST Investment

1031 exchanges are a great way to defer taxes on the sale of investment or business property, but they can be costly mistakes if not done correctly. Millions of dollars in potential tax savings are lost each year due to simple mistakes in 1031 exchanges. This article will outline the 10 most common mistakes made in 1031 exchanges and how to avoid them, so you can save money and complete your exchange seamlessly.

1. Mistake: Not following the 45th and 180th-day schedule.

One of the most common mistakes in 1031 exchanges is not following the 45th and 180th-day schedules. If you do not follow these deadlines, you could forfeit your opportunity to complete a 1031 exchange. The 45th-day rule requires that you identify potential replacement property within 45 days of selling your original property. The 180th-day rule requires that you have closed on the replacement property by the end of the 180-day period. If either of these deadlines is missed, you will have to start the process all over again.

2. Mistake: Not understanding the requirements of a 1031 exchange.

Another common mistake is not understanding the requirements of a 1031 exchange. To qualify for a 1031 exchange, you must meet four basic requirements:

1) The property must be an investment or business property.

2) The property is sold, and the proceeds are used to purchase the replacement property.

3) The replacement property must be of like kind and in equal or greater value than the original property.

4) You must complete the exchange within 180 days of selling the original property. If you do not meet any of these requirements, you will not qualify for a 1031 exchange.

3. Mistake: Requesting funds from the exchanger prior to closing on the replacement property.

Another common mistake is requesting funds from the exchanger before closing on the replacement property. This can cause problems because the funds are not considered to have been received until the replacement property is actually closed. If you prematurely request funds from the exchanger, you could be deemed in default of the 1031 exchange and lose your opportunity to complete it.

4. Mistake: Not consulting a tax advisor.

One of the most important things you can do to avoid mistakes in a 1031 exchange is to consult a tax advisor. A tax advisor will help ensure that you meet all of the requirements for a 1031 exchange and help you avoid any costly mistakes. If you choose not to consult an advisor, you are taking a risk that could cost you thousands of dollars in potential tax savings.

5. Mistake: Changing the ID letter on the replacement property.

Another common mistake is changing the ID letter on the replacement property after the 44th day. This can cause problems because it could be interpreted as a violation of the 45th-day rule. If the replacement property is not of like kind and in equal or greater value than the original property, you could be deemed in default of the 1031 exchange.

6. Mistake: Closing on the replacement property before closing on the original property.

Another mistake people often make is closing on the replacement property before closing on the original property. This can cause problems because it could be interpreted as a sale of the original property. If you close on the replacement property first, you could be deemed in default of the 1031 exchange.

7. Mistake: Not following all of the rules for a 1031 exchange.

The most common mistake people make in 1031 exchanges is not following all of the rules. If you do not follow all of the rules, you could be deemed in default of the exchange and lose your opportunity to complete it. To avoid this, be sure to consult a tax advisor and follow all of the applicable rules.

8. Mistake: Failing to identify potential replacement property within 45 days.

Another common mistake is failing to identify potential replacement property within 45 days. If you do not identify potential replacement property within 45 days, you will have to start the process over again. To avoid this, be sure to research potential replacement properties and have them identified before selling your original property.

There are Risks If You Fail To Consult With a CPA/Tax Advisor

One factor that you need to consider when doing a 1031 exchange is the potential risks involved if you fail to consult with a CPA or tax advisor. Failing to follow all of the rules for a 1031 exchange can result in you being deemed in default of the exchange, which could cost you thousands of dollars in tax savings.

Additionally, not consulting with a tax advisor could lead to costly mistakes that could invalidate your 1031 exchange. By working with a tax advisor, you can avoid these risks and ensure that your 1031 exchange goes smoothly.

The Importance of Professional Help

When doing a 1031 exchange, it is important to remember that there are many rules and regulations that must be followed. To ensure that you are following all of the rules and avoiding any costly mistakes, it is highly recommended that you work with a tax or legal advisor. By working with a professional, you can rest assured that your 1031 exchange will be handled correctly and that you will avoid any potential problems.

If you are considering a 1031 exchange, it is important to understand the most common mistakes people make in order to avoid them. Some of the most common mistakes include not following all of the rules, failing to identify potential replacement property within 45 days, and closing on the replacement property before closing on the original property.

To avoid these mistakes, be sure to consult a tax advisor and follow all of the applicable rules. Additionally, remember to research potential replacement properties and have them identified before selling your original property. You can ensure that your 1031 exchange goes as smoothly as possible by taking these steps.

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