What disqualifies a 1031 exchange?

The first fatal error is a right to the money, even one you never use

Reg. §1.1031(k)-1(f)(2) puts you in constructive receipt when money is credited to your account, set apart for you, or otherwise made available so that you may draw upon it at any time, or if notice of intention to draw is given. The same paragraph treats receipt by an agent of yours as receipt by you.

Inside the safe harbors the trigger is earlier still. Paragraph (g)(4)(vi) says the intermediary safe harbor ceases at the time you have an immediate ability or unrestricted right to the funds, so an exchange agreement without the (g)(6) limits fails on the day it is signed rather than on the day money moves.

Practical versions of this error: net proceeds wired to your attorney's trust account, a check made out to you and endorsed over, or an ordinary escrow holding the money with no restriction on your access. Can I touch, borrow against or pledge my exchange funds? covers what the account may and may not do.

The second is a date, because §1031(a)(3) contains no hardship clause

The identification period closes at midnight on the 45th day after the relinquished property transfers. The exchange period closes at midnight on the 180th day, or on your return's due date with extensions if that arrives first (Reg. §1.1031(k)-1(b)(2)).

There is no relief valve. FS-2008-18 allows exactly one exception to those two limits, a presidentially declared disaster, and rules out hardship of every other kind, which is why a slow lender, an ill seller or a collapsed contract changes nothing.

The sequence matters as much as the count: Are the 45 days part of the 180? and Can I get an extension? set out how little room there is. A December sale can also lose weeks unless the return is extended, as Do I need a tax extension to keep my full 180 days? explains.

The third is a list that breaks the count, or never reaches a permitted recipient

Over-identification is the error most people do not know exists. Under Reg. §1.1031(k)-1(c)(4)(i) you may name three properties of any value, or any number whose aggregate fair market value stays within 200% of what you sold; exceed both and (c)(4)(ii) treats you as if no replacement property had been identified at all.

The only rescue is the 95% rule: identifications beyond the limits still count for property you actually receive before the end of the exchange period, but only if you receive at least 95% of the aggregate value of everything you named.

Delivery is a separate trap. The identification must be a written document signed by you and sent to the person obligated to transfer the replacement property, or to another person involved in the exchange who is not you or a disqualified person; FS-2008-18 is explicit that a notice handed to your own attorney, agent or accountant does not count.

Description is the third leg. Paragraph (c)(3) requires the property to be unambiguously described, which for real estate means a legal description, street address or distinguishable name, and paragraph (d)(1)(ii) requires that what you receive is substantially the same property as identified.

The fourth is the wrong firm holding the money, or the wrong name taking title

Reg. §1.1031(k)-1(k)(2) sweeps in anyone who has worked for you during the two years that end when your first relinquished property transfers, whether as an employee, a lawyer, an accountant, a banker or a broker of any description. Work done on §1031 exchanges, and routine escrow, title or trust services, are ignored for that test.

FS-2008-18 adds the obvious corollary: serving as your own facilitator is not an option. An exchange run through your own company, your brother's escrow firm or your long-standing CPA is outside the safe harbor from the start; Can my attorney, CPA or agent be my QI? works through the relationships.

The name on the deed is the parallel failure. The taxpayer that sold has to be the taxpayer that buys, so a replacement recorded to a new partnership, a different LLC or a co-investor is a different taxpayer for tax purposes; Same-taxpayer rules and Can I 1031 from my personal name into an LLC? cover the exceptions.

The fifth is property that was never eligible on either side of the trade

Section 1031(a)(2) excludes any exchange of real property held primarily for sale, which is what removes inventory, lots built for resale and most flips; see Can I 1031 exchange a fix-and-flip?.

Since 2018 only real property qualifies at all, and Reg. §1.1031(a)-3, which applies to exchanges beginning after 2 December 2020, lists what is not real property for this purpose: stock, bonds or notes, other securities, interests in a partnership, certificates of trust or beneficial interests, and choses in action. A licence or permit to operate a business on real property is also excluded, whatever state law calls it.

That excluded list is why a beneficial interest in a trust needs its own authority to work as replacement property, which Do DST interests really qualify as like-kind? sets out.

Two more categories fail outright. Section 1031(h) provides that real property located in the United States and real property located outside the United States are not property of a like kind, and FS-2008-18 confirms that property used primarily for personal use, such as a primary residence or a vacation home, does not qualify; Can I 1031 exchange my primary residence or second home? handles the mixed-use cases.

What is not fatal: boot, a description that is merely ugly, and one dead deal on the list

Receiving cash or debt relief does not disqualify anything. The Form 8824 instructions state that where you also receive non-like-kind property or money, gain is recognised to the extent of that property and money, which is a taxable slice rather than a lost exchange.

Closing-cost misallocations work the same way. Reg. §1.1031(k)-1(g)(7) disregards the usual closing items, meaning title fees, recording and transfer taxes, prorated taxes and commissions, and anything paid from exchange funds outside that list is boot rather than a disqualification; see Which closing costs can be paid from exchange funds?.

A wrong unit number or a misspelled street name is survivable if the property is still unambiguously described, because (c)(3) asks for clarity rather than perfection. And an identified property that dies after day 45 does not take the exchange with it when another named property closes, as Can my exchange partly succeed? shows.

The file that answers an examiner, in eight documents

Assemble this while the closings are fresh; reconstructing it two years later is where good exchanges start to look bad. How likely is an IRS audit of my 1031 exchange? covers retention periods.

• The exchange agreement, with the paragraph restricting your access to the proceeds
• The assignment of the sale contract and the written notice to the buyer, dated on or before the transfer
• Both settlement statements, with the intermediary shown on the seller and buyer lines
• The signed identification, plus proof of when it was sent and when it arrived
• Both deeds, showing the same taxpayer disposing and acquiring
• Wire confirmations from escrow to the intermediary and from the intermediary to the replacement closing
• The intermediary's account statement, including any earnings credited
• Form 8824 as filed, with Form 4797 or Schedule D for any boot, and your basis schedule for the replacement