Friday, October 12, 2007

Be careful with those 1031s -- the IRS is watching!

The Real Estate Bloggers report that the IRS is applying greater scrutiny to tax-deferred exchanges of like-kind property pursuant to Section 1031 of the Internal Revenue Code. This tax-deferment vehicle has become hugely popular in the last ten years as a way of not having to recognize the gain on the sale of property.

Because of the rise in popularity, every Tom, Dick or Harry now wants to be an exchange accommodator. And frankly, not every deal is done by the book. One thing to remember: your lawyer, your accountant and your real estate broker, or any entity under their control, cannot be the qualified intermediary. I've seen this more than once (though not on deals in which I was involved directly). No matter how perfectly those people may otherwise be able to handle your 1031, if you take that route you just blew your 1031, and if the IRS audits you, guess what? Taxes, penalties and interest. No thanks.