Why 60% of 1031 Exchanges Fail: No Plan = No Chance
You’ve probably heard the saying before: “People don’t plan to fail—they fail to plan.” That quote couldn’t be more true when it comes to 1031 Exchanges.
The following is an overview of the steps a property investor should take in the proper planning of a possible 1031 Exchange. This is the first of a four part series, where I will break down each phase of steps… First steps/ Next Steps/ Final Steps – Execution.
If you’ve followed me for any amount of time, you know that more than 60% of 1031 Exchanges fail. Every year. Let that sink in. And while there are countless reasons why, the underlying common denominator is almost always the same: a complete lack of planning.
It’s shocking how often I hear this:
“We’re already in escrow on our property to relinquish (downleg)… and now we’re trying to figure out our exchange options.”
At that point, I can’t help but shake my head. If you’re in escrow and haven’t mapped out a solid plan, you’re already behind. And unless you’ve had a conversation with me early on, there’s a good chance you’re setting yourself up for an avoidable failure.
The truth is, any investor thinking about selling an investment property with substantial equity and minimal debt should begin their 1031 planning immediately—BEFORE they put it on the market, not after escrow opens, not while they’re packing up files, not after their CPA warns them about the tax bill.
Let me be blunt: by the time you’re in escrow without a plan, your clock is already ticking. And in many cases, it’s too late to go back and fix what should’ve been addressed months—or even years—earlier.
Ownership Matters More Than You Think
One of the biggest mistakes I see is investors assuming they even qualify for an exchange under their current ownership structure. That’s a dangerous assumption. Not every entity or ownership scenario is eligible to complete a like-kind exchange. Some investors learn that the hard way—after they’ve gone into contract.
Reworking entity structures or restructuring ownership rights can take months, and in certain cases, years to do it correctly. You can’t force a clean 1031 Exchange overnight.
I’ve seen it too many times: a seller charges into escrow without verifying if they’re even eligible to exchange. By the time they realize they can’t, it’s too late to reverse the sale, and they’re hit with a painful, avoidable tax bill.
Planning is Everything—Start with the End in Mind / First Steps
Before anything else, the investor should be asking:
- What are my short- and long-term investment goals?
- How does this potential sale align with my overall financial or succession strategy?
For many of my clients, a properly structured exchange opens the door to generational wealth. But you have to plan for that—not stumble into it.
Once those investment goals are clearly defined, it’s time to put a real plan in motion. That starts with assembling the right team:
- Talk with your CPA and get clear on what your tax implication might be, maybe an exchange isn’t necessary after all.
- You should sit with your financial advisor to discuss the aforementioned short term and long term investment goals.
- A conversation with an estate attorney, especially if you do not have a trust, would be smart as a well planned and executed exchange could be a springboard to creating multi-generational wealth.
Next Steps – Know Your Options!
- Your buyer-side broker should already be scouring the market for replacement options (the upleg), giving you a sense of what’s out there in terms of cap rates, pricing, and lease structures.
- Your financial advisor should be speaking with DST (Delaware Statutory Trust) Sponsors to line up passive investment alternatives. DSTs can be powerful tools when used correctly.
When you’ve done that homework—before you list your property—you’re in a position of strength. You now know the marketplace, you understand your fallback options, and you’re ready to move when that serious buyer steps up.
Final Steps: Execution in Motion
Here’s how it should go: once your upleg options have been vetted and you’ve got a mapped strategy in place, you list your property. When a buyer comes along and their earnest money deposit goes non-refundable—then you start submitting offers on your replacement property.
This way, you’re not scrambling during the tight 45-day identification window. You’re acting with purpose and precision. That’s the difference between closing a successful exchange and watching one fall apart.
Even the Best Plans Need Flexibility
Even with a rock-solid plan, things can still go sideways. Deals fall out. Properties get snatched up. Lenders can create roadblocks. That’s exactly why the upfront planning is so critical—because the margin for error once escrow closes on the relinquished property is razor-thin.
Remember: you have 45 days to identify and 180 days to close from the date your downleg closes. That’s not a lot of time. It goes by fast—especially if you’re just starting your planning process the day your sale closes
Bottom line: If you’re an investor thinking about selling an income property, don’t wait. Don’t assume. Start the 1031 planning conversation early. Get your team aligned, your upleg strategy dialed in, and your entity structure reviewed.
You don’t plan during a 1031 Exchange—you plan before it.
Let me help you get it right the first time.
We Are Here to Help!
If you are an investment property owner who is interested in a no obligation, private consultation, please visit www.Best1031Online.com, or contact James Bean
of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031
or email at [email protected].
If you are an agent/broker, I am happy to discuss strategies with you on how to best serve your next listing client in preparing them for a successful exchange. Please visit the site and click on the Agent’s button located at the top right-hand corner of the Home Page!
Don’t know what certain terms mean?
Click here for a Glossary of Terms: https://svn-best1031online.com/glossary/
Want more on the 1031 Exchange?
Come join me on my YouTube Channel “Best 1031 Online”
The ONLY channel 100% dedicated to all things 1031!
And visit CRE Task Wizard at https://cretaskwizard.com/, who supports me in making the channel happen.
Please stay tuned and follow me on LinkedIn, X (formerly known as Twitter), Instagram, & Facebook @1031BrokerJames.
All information is deemed to be accurate and is not tax or legal advice. All investors/taxpayers should consult their CPA, tax attorney and investment advisors.