Daily Real Estate News  |  October 10, 2007  |   IRS Plans to Take Hard Look at 1031 Exchanges
The Internal Revenue Service is stepping up its oversight of 1031 like-kind exchanges after a report by the U.S. Department of Treasury Inspector General for Tax Administration pointed out that its use has doubled since 1998.

The IRS will be providing guidance on the issue of 1031 exchanges for second and vacation homes that aren’t used exclusively by the owner.

The report said some "may see this as an opportunity to invest in second and vacation homes at reasonable prices." Given the lack of regulations, statutes and court cases in this area, taxpayers and promoters "may mistakenly take the position that any transaction not specifically prohibited by IRS guidance would be entitled" to like-kind exchange treatment, the report said. "Unscrupulous or uninformed promoters" already are taking advantage of the IRS's "silence" on this subject. "For example, one promoter advised that taxpayers could sell their vacation homes using like-kind exchanges even though the homes were never rented."

Bruce Friedland, an IRS spokesman, said the agency "urges taxpayers to keep documentation on hand to substantiate 1031 exchanges." That documentation "is critical if the IRS has questions," he said.

Source: The Wall Street Journal, Tom Herman (10/10/2007)