1031 Exchange

Everyone loves a tax deferred, like kind, or 1031 exchange, because you can defer tax on property by swapping real estate, instead of selling the property and paying capital gains tax. Well, the Treasury Inspector General for Tax Administration has noticed all that love, and issued Audit Report 2007-30-172 “Like-Kind Exchanges Require Oversight to Ensure Taxpayer Compliance” Dated 09/17/2007. The report notes that there are a growing number of taxpayers using 1031 exchanges, but that many do not meet the requirements. No surprise there. When real estate lawyers boast that they can structure a like kind exchange for $500 at the closing using a service company that prepares the paperwork, you have to get a bit curious. 1031 is not exactly a cake walk of simplicity. These deals should really be done under the guidance of tax attorneys and tax accountants. When you use a 1031 exchange you must report it to the IRS on Form 8824. In 2004, 338,500 Form 8824s were filed deferring $73.6 billion. The Report noted particularly that there are those promoting the inappropriate tax free exchange of vacation and second homes. It acknowledges the complexity and lack of clarity and guidance concerning the exchange of vacation homes. Other areas of concern include tracking the gain on subsequent transactions, related party exchanges, incorrect property basis data (which is essential to determine the taxable gain when you finally liquidate), partial, step and bartering 1031s. The bottom line is simple. There are huge dollars at stake and you should expect more audits of 1031 transactions, and particular attention to some of the items stated.