A real estate investor shares the realities of doing a 1031 exchange

That’s part-time real estate investor Steve Lewis, who bought his first property in 2000 and extended to three leases before being sold in 2024found when trying a 1031 exchange.

His first step was to find a qualified intermediary (QI) who specializes in 1031 exchanges. They’re the ones who move the money — the QI holds the proceeds of the sale until the investor buys their replacement property — and charge between $600 and $1,200, depending on the transaction.

“When you sell, the money won’t be sent to you,” Lewis explained. “It won’t hit your bank account. You won’t get a check. The money is sent to the middleman.”

As soon as you sell, the clocks start: you must identify the replacement property or properties (you can identify up to three similar properties) in writing within 45 days of the sale of the first property.

You must then close on the replacement property within 180 days of the original sale of the property.

“In my opinion, that’s not enough time,” Lewis said. “I felt like I was rushed. I didn’t want to just find something to save money on tax.”

However, he managed to identify three properties within the 45-day limit. His best choice was a small office building, and he immediately began the process of obtaining financing. He was then caught up in many red tapes.

He faced a few problems. For starters, commercial real estate transactions are more complex than residential ones. It took some time for the bank, which requested plans and assessed the profitability of the property, to approve the building.

“It’s like death by paper,” Lewis said. “And on top of that, with commercial real estate, you have to have a lawyer, and the seller will have a lawyer. So now it’s lawyers contacting lawyers, and it becomes a slower-than-molasses process.”

After months of back and forth, the seller ended up changing his mind and decided to keep the property. The deal was off the table, and Lewis was approaching the 180-day deadline.

“I didn’t have enough time to go to the second property on my list,” said Lewis, who ended up walking away and paying capital gains tax on the sale. He owed about $1,000 to QI, he said, but the fee didn’t bother him. “I’m glad I went through with it. It was worth the $1,000 to learn.”

His main takeaway was that 180 days go by faster than you might think. While his failed 1031 experience may be “rare,” he noted, “there are so many things that could delay a closing.” His advice is to plan as much as possible for your next property purchase.

Lewis says he would consider a 1031 exchange in the future if the 180-day rule was extended to a year. Six months is too tight a time frame and gives it “the feeling of gambling,” he said. He would rather not rush into a purchase and possibly make a bad decision just to save on a tax bill. “I like to really think about things and let them sit for a minute”