A 1031 exchange is a tax structure. Title and escrow run the two (or more) closings next to it. NESI is not a Qualified Intermediary and does not decide whether gain is deferred.
The list below highlights real-world 1031 exchange pitfalls that show up on a live file. What these issues mean for the IRS or the Franchise Tax Board is a question for the investor’s CPA and tax attorney.
Key 1031 Exchange Pitfalls to Avoid Before Closing
1. Identification Dates No One Wrote Down
People talk about a 45-day identification window after the sale records. If the QI and the investor have not put dates in writing, the purchase escrow is guessing.
2. Sale Proceeds Aimed at the Seller
On a delayed exchange, the sale wire usually goes to the QI. A request to “send it to me and I’ll forward it” is a stop-the-line moment. Call the QI immediately do not close that gap with a personal check.
3. Replacement Price Below the Sale Price
That gap is what tax people call boot risk. Escrow will still close if the instructions are complete, but we will not tell the investor it is tax-free.
4. Smaller Loan, No Other Funds
Pay off a large loan and place a smaller one, and the tax advisor will ask about debt differences. Put these numbers on the estimate early to prevent surprise 1031 exchange pitfalls.
5. Replacement Escrow That Cannot Record Inside the QI’s Window
People quote 180 days from the sale. Lender conditions, HOA packets, and county recording do not move just because a tax calendar exists. Open the purchase file the same week as the sale.
6. California Property Out, Somewhere Else In
Leaving California real property for a replacement in another state can trigger Franchise Tax Board reporting (investors and CPAs often mention Form FTB 3840). Escrow does not file it, the CPA does. Flag the out-of-state replacement on the order.
7. The Wrong Party Holding the Money
A related person or the investor’s own agent is a major QI problem. So is a QI nobody can reach on funding day. The tax counsel picks the QI; escrow only follows the wire instructions on the page.
What NESI Does on These Files
To help agents navigate potential 1031 exchange pitfalls, NESI offers comprehensive support:
- Open sale and purchase files smoothly.
- Hold and send funds strictly as instructed.
- Keep title and escrow managed on one desk.
- Answer the agent and lender promptly by call or text.
Note: We do not track the investor’s tax calendar or certify the exchange.
Frequently Asked Questions (FAQs)
What happens if you miss an identification date?
That is an immediate conversation for the Qualified intermediary and the tax advisor on the same day not something defined by a blog rule.
Can escrow “fix it” after recording?
Usually, the money and the deeds are already gone once recorded. Do not expect a rewind from escrow.
Is a cheaper replacement property always taxable?
Tax counsel answers this question. Escrow will provide and show the numbers.
Why does the QI pick matter so much?
They hold the exchange proceeds. Always ask the tax advisor about the QI’s independence and how funds are safeguarded to avoid serious 1031 exchange pitfalls.
This article is general information only. It is not legal, tax, or insurance advice and is not a commitment to act as a Qualified Intermediary, meet any IRS or FTB deadline, issue title insurance, or close any transaction. Section 1031 and California filing obligations depend on the investor’s facts and current law. Readers should consult their own qualified attorney, CPA, and Qualified Intermediary. NESI Title and Escrow Company assumes no liability for reliance on this content. Services are provided subject to applicable law, underwriting, and written escrow instructions.
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