Understanding Real Estate
Tax-Deferred Exchanges
A Layman's Guide to Section 1031 of the Internal Revenue Code
By ALBERT J. VELARDE, M.A., J.D.
Includes 1991 IRS Regulations © Copyright 1991, 1994, 1996 Albert J. Velarde
Previous chapter: Summary of Section 1031 Requirements
The best advise I can give you is to USE EXPERTS!! It is too easy to make a mistake and lose your tax deferral. Improperly documented exchanges, even if you state your intentions in writing, have led to numerous DISALLOWED EXCHANGES by the IRS. Missing the 45 day or 180 day rule deadlines will cause the entire exchange to be DISALLOWED!The penalties are severe! The IRS can assess the back taxes owed with a 25% PENALTY, and all at 20% INTEREST. A $ 10,000 tax owed could add up to a total of $ 17,500 due in two years when you get audited.
The IRS strongly believes in substance over intention. In other words, you must prove your intentions of doing an exchange, in writing, each step of the way. The IRS requires that you use either a "Qualified Intermediary" or "Qualified Escrow Accounts" (where the buyer of your property will buy the replacement property for you), or a "Qualified Trust" (where you hire a Trustee to hold the buyers money and acquire the replacement property for you).