Potential Risks in Doing a 1031 Exchange

1031 Exchange Risks

Many people are worried about the potential risks of doing a 1031 exchange. In this article, we will walk through some of those risks and discuss how to mitigate them.

Replacement Property Identification

One of the risks is that you're under the gun to make an identification of replacement property within 45 days of the sale and closing of the old relinquished property. You may be under the gun and feel the pressure and be forced to make an identification of property that doesn't really meet your investment criteria. You may be picking properties for tax reasons and not necessarily for business reasons and that could result in purchasing replacement property that either does or doesn't fit your needs. How can you mitigate the risks of making a bad decision in a 1031 exchange?

Think Three Moves Ahead

If you think about this like a chess player thinking three moves ahead you will be searching out and targeting replacement properties even before you sell your old relinquished property. You will use all of that time productively to ascertain what it is you want to buy and maybe even tie that property up with a purchase contract so that you know at the onset of your exchange that you've got a sure thing to exchange into that meets your investment and business criteria.

The other thing that you can use to mitigate risk in a 1031 exchange is to park a replacement property in a reverse exchange by having the qualified intermediary close on the replacement property even before you have closed on the sale of your old relinquished property.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

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