1031 Exchanges Coming Under Greater Scrutiny From The IRS
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If you are looking to sell a property and use the 1031 exchange, it is up to you to make sure that all your t’s are crossed and i’s dotted. With the huge surge in 1031 exchanges, they jumped from 22.8 billion in 1998 to 73.6 billion in 2004, the IRS announced they will be giving greater scrutiny to these 1031.
What this means is that if the complicated process is not followed to the letter of the law the IRS can charge you taxes, penalties, and interest. And I will tell you, these expenses can add up in a hurry. So if you are planning on a 1031 exchange make sure that it is not your cousin Larry that will be helping you with it. Find an expert in the process and make sure that the law is followed exactly, otherwise your tax saving 1031 exchange could get very expensive very quickly.
Copy of the IRS Announcement on 1031 Exchanges.
In September, the IRS agreed to step up oversight of like-kind exchanges after a report by the Government Accountability Office criticized the agency’s handling of the issue. In a report acquired by DTN, Kathy Petronchak, an IRS commissioner, said the agency would take corrective actions, including conducting a study of compliance and revising taxpayer instructions for 1031 property.
Even honest taxpayers may be snagged by the complexities of 1031 provisions, tax practitioners said. With Midwest farmland appreciating at double-digit rates the past few years, “the risks of screwing up and triggering a gain on a land sale could be outrageous,” said Rick Christiansen, a CPA who oversees agribusiness accounts for LarsenAllen LLC in New Ulm, Minn. If IRS finds that taxpayers have not followed the rules, they can be held liable for taxes, penalties and interest on their transactions.
Christiansen said it’s imperative that taxpayers meet terms for eligible property, comply with the law’s deadlines for identifying the substitute property and closing the transaction, and use what IRS calls “qualified intermediaries” to handle details and escrow accounts. via Farms.com
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Pingback by TrafficCourt » Blog Archive » 1031 Exchanges Coming Under New Scrutiny on 11 October 2007:
[...] Via Real Estate Bloggers. [...]
Comment by john harper on 12 October 2007:
The 1031 industry is in need of some serious oversight. Dean Guadagni has been following the current mess and those losing their life savings over on Dean’s Guide
Comment by dean guadagni on 12 October 2007:
Tom,
You are right on the money. I just picked up on the Dept of Justice’s announcement that pertains to your post. I whole heartedly agree with your assessment.
The sad fact remains that only a handful of states have taken it upon themselves to “attempt” to create legislation that protects the consumer.
In the case of the victims of Ed Okun, many have commented that they are now fearful that they will be out their life savings AND that they are being threatened by the IRS for taxes in their 1031 deals!
How insane is the idea that a consumer would lose their entire nest egg and then be liable for the taxes in a failed 1031 deal?
Thank you to John Harper for the kind mention
Dean
Pingback by Realtors, Brokers, and Mortgage Professionals Watch Out: Department of Justice Antitrust Division Launches Site On Competition In Your Industry « DeansGuide on 12 October 2007:
[...] For more pertinent information on 1031 exchanges and the real estate industry check out http://www.therealestatebloggers.com. Tom writes an excellent warning: 1031 Exchanges Coming Under Greater Scrutiny From The IRS. [...]
Comment by JadeEJF on 15 October 2007:
You know, I’m not surprised. But then again, there are a lot of creative real estate transaction ideas that the IRS should probably take a look at. Lease options come to mind, but… another one that I saw in NuWire recently was land trusts: http://www.nuwireinvestor.com/articles/land-trusts-for-real-estate-investors-helpful-or-hype-51300.aspx … though somehow I think land trusts are a little less … problematic than 1031s or lease options might be. Hard to say for sure, though…
Comment by dean on 18 October 2007:
Jade,
The 1031 industry is attempting to clean up. State run legislation in Nevada and California are in the works or have already been implemented. These laws are designed to help consumers avoid the heart ache and pain of losing a retirement nest egg to a crooked Qualified Intermediary.
The reality remains unchanged if you watch the 1031 Tax Group proceedings of crook Edward Okun. Many consumer’s lives have been financially ruined as a result of their retirement savings being stolen.
The only real safeguard, until nasty criminal penalties are enacted, is to avoid a 1031 exchange completely and search for another investment vehicle which would provide a safer tax sheltering strategy.
Pingback by IRS Cracking Down On Charities Involved In Real Estate Deals — The Real Estate Bloggers on 23 October 2007:
[...] like the IRS has set it’s sights on the Real Estate world. Last week we talked about how the IRS is cracking down on 1031 exchanges. Now they are going after charitable donations that create huge tax windfalls for the taxpayer but [...]
Comment by Chad Hallberg on 24 October 2007:
Dean -
As to your comment: “The only real safeguard, until nasty criminal penalties are enacted, is to avoid a 1031 exchange completely and search for another investment vehicle which would provide a safer tax sheltering strategy.”
I just wanted to say as a Qualified Intermediary myself, that Edward Okun is an anamoly. Every industry has ways to cheat the system. The 1031 industry set up its own regulatory body, the Federation of Exchange Accommodators (FEA), in order to control itself.
My advice to anybody thinking of doing a 1031 exchange is to look at http://www.1031.org, the FEA’s website, and find a reputable Qualified Intermediary you can trust. You should also make sure to get personal testimonials of the character and reliability of your Qualified Intermediary BEFORE you do the 1031 exchange.
The 1031 exchange industry is unfortunately being represented solely by the few who make negative headlines. Look to the thousands that follow sound business practices and are adding to society positively.
Sorry to sound terse, but I just thought this needed to be said.
Comment by dean on 25 October 2007:
Chad,
No offense taken at all. In fact I have written over 40 articles on the 1031 Exchange industry. My focus has been on the 1031 Tax Group and Okun as well as McGhan from Southwest.
I was originally put on the subject by a close friend who works for one of the major title insurance company’s 1031 subsidiary.
As a real estate consultant, I have met far more reputable and well meaning people in the industry; most have been quality individuals who are concerned with the welfare of all their clients.
My statement was a byproduct of the stories that have been emailed to me, sent to me through comments on my blog, and phoned in. Many investors were ruined by Okun and McGhan. Of course those are only two men but the roughly $200 million gone remains a hardship to those victims.
The other reason for my negativity was the fact that there are few professional standards, outside of the FEA, for people wishing to become Qualified Intermediaries.
Finally, according to legislation that I have followed, only Nevada has enacted any kind of laws to regulate the industry. California is apparently considering following Nevada’s lead but things still remain wide open for abuse.
My statement was not meant to harm those outstanding well meaning and ethical 1031 exchangers. Instead it was my opinion that the only 100% true lock of a safeguard was to avoid the investment until laws and regulations weeded out the minority of rip off artist that prey on the unsuspecting.
I honor the fact that you wrote in. I also honor the fact that you must be a positive and ethical businessman. I appreciate your balancing the ledger and giving everyone the other part of the story. Thanks Chad
Comment by Bill on 12 November 2007:
Anyone know just how bad it can get? I have a property being foreclosed on by a lender bank, which will take all the equity and leave me about a $1,000,000 IRS obligation!?
Pingback by Ed Okun’s 20 Question Legacy: Who, What, Why, How Don’t Begin To Cover It « DeansGuide on 14 April 2008:
[...] this industry as a place of change-a rallying cry for their campaigns of change? 16. When will national laws be instituted, similar to drug laws, that outline criminal penalties on a federal platform as a [...]