Anecdotal 1031 Exchange. Who's actually done it?

Question

I get the concept (number of days, etc), but how was the operational aspect?

- Were you audited which seems very likely with 1031s?

- Is there a huge delay in filing taxes since the 1031 admin has to liaise with your accountant? Can you even efile?

- Upon sale of the asset down the line, are you in a higher position to be audited given they may ensure you are using lower basis or is it the same as every other return after the 1031 is over?

It seems many 1031's fail given the requisite of a short timeline sale/purchase but just wanted to hear those lucky enough to do it, thanks.

Dave Foster · Answer

@Mike Kalob,

Coming in with the perspective of one who did my first exchange for myself in 1999 as well as a provider of them for clients over the last 19 years.   Here's some specific answers.

1. 1031s are not an audit trigger.  So there's no greater likelihood of an audit with or with out up to now.  Of course if you're audited it's something they could and probably would examine.  But over the last 18 years I haven't seen more than a handful of audits personally.  That's actually one of the problems with 1031 that the IRS has a hard time resolving because there are so few audited every year it is difficult to create a large body of case law precedent.

The law leans to subjective definitions of intent other than the few specific hard guidelines.  and intent is difficult to deny.

2. There should never be a delay in filing taxes.  The 1031 is designed so that it will always be complete prior to the filing of your next tax return.  The only documents your accountant needs will be the actual closing statements along with their own basis calculations and depreciation schedules.  The only time an exchange can impact a tax filing is if your tax filing deadline happens before the 180 days expire.  In that event you either let the exchange die and file as normal.  Or you simply file an extension.

3. Once the 1031 is complete it is reported by your accountant with the 8824 which reports the non-recognition of gain, transfers the basis of the old property forward, and sets up the new depreciation schedules.  Once this is done the rest of your ownership follows those schedules.   So there is nothing that changes and no higher chance of audit.

4. This is a common misconception.  And my initial response would be that kind of flexibility is exactly what you want.  There is no penalty for starting and not completing a 1031 exchange (remember it will always be complete prior to your next tax filing).  So the ability to start, examine the market, attempt to make a good purchase but at the last minute decide not to is not a weakness of the 1031 it is a strength.

But that being said it's a misconception that a lot of 1031s fail.  Last year I could count the ones that were not completed on one hand.  The bottom line is that a real estate investor who works at it will find good replacements within those time lines.  And remember it's not just 45 days. You don't close your property sale and then say "Oh crap I've got to shop."  Most of our investors are shopping for replacements 30-90 days before their old property even closes.

The prudent investor starts shopping well in advance of their sale.  They will go into contract on their purchase before their old property closes.  They will use contingencies and options and other strategies to control properties before they have to take title.  and they'll perform due diligence so much in their desired market that even if they don't find a property before their old one closes they will know the market so well that they know instantly a good deal when they see it and act swiftly and decisively.

If you don't like paying taxes and can find a better use of that tax money helping yourself then jump in!! they're nothing to be scared of.