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 October 11, 2007

IRS Intends to Look at 1031 Exchanges
The use of the 1031 like-kind exchanges have doubled since 1998. A report by the U.S. Department of Treasury Inspector General for Tax Administration brought this activity to the attention of the Internal Revenue Service.
The Internal Revenue Service intends to provide guidance regarding the issue of 1031 exchanges when they are used for the purchase of second and vacation homes that are not used exclusively by the buyer.

The report stated that some buyers may see the 1031 exchange as an opportunity to invest in vacation or second homes at bargain prices. In light of the lack of regulations regarding 1031 exchanges, statutes and court cases in this area, taxpayers and promoters of these exchanges may mistakenly take for granted that any transaction not currently prohibited due to IRS guidance would be entitled to be treated as a like-kind exchange transaction. A large number of unscrupulous or uninformed promoters are taking advantage of the Internal Revenue Service's silence on this subject. One promoter advised a client that taxpayers were able to sell their vacation homes using the 1031 exchange process even though the homes were never rented.

The IRS advises taxpayers who enter into 1031 exchanges to keep proper records of their transaction if the IRS ever has any questions of them.

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