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Most Common Real Estate Tax Audit Issues In 2014 And How To Avoid Them

Most Common Real Estate Tax Audit Issues In 2014 And How To Avoid Them

Selling, Exchanging and Facilitating a Tax Deferral Strategy Requiring the Use of a Qualified Intermediary and IRC 1031 Requires Careful Planning and a CPA or Tax Attorney

Internal Revenue Code Section 1031 Like-Kind Exchange Audits continue to find non-compliance in some common areas.  Specifically, the following list of items are repeatedly flagged for audit by the IRS.  Please take a close look at this list, which is by no means comprehensive, and always have your CPA or tax attorney help you prepare and file 1031 exchange paperwork and returns.

1031 Basics

1) Gain computation errors (i.e. taxable boot* due to debt; non-exchange expense items included in the computation)

2) Invalid identifications (fail the three-property 200% to 95% tests; by not acquiring substantially the same property that was identified; or identifying a partial interest and acquiring a higher percentage interest)

3) Wrongful inclusion of property improvements made after the exchange closed in the boot calculation

4) Withdrawing cash out of proceeds from relinquished property (i.e. all cash needs to be used for purchase of exchange property)

5) Partnership/LLC Property Dispositions regarding foreclosures of real property and wrongful accounting of cancellation of debt (COD) income

*Boot defined – cash or property of a type not included in the definition of a nontaxable exchange.  The receipt of boot will cause an otherwise tax-free transfer to become taxable (Black’s Law Dictionary)

1031 Diagram

Exchanging income producing property into or upgrading into triple net (NNN) commercial property or other similar like-kind property is an incredibly profitable strategy which some of the wealthiest individuals, families, private companies, and corporations have as a basis of their generational wealth building strategy.  These types of transfers are best left to professionals to facilitate and navigate the transactions and associated tax ramifications.

Please contact me for specific questions about income-producing property strategies, tax strategy advice referrals, and any other questions regarding these issues and transactions.  I’m confident I can point you in the right direction and help identify an avenue for clarification or strategic involvement.

About Shelly Roberson

Shelly Roberson has 25 years of experience; 600+ closed transactions; UC Berkeley grad; Shelly has worked in the same Palo Alto office for 23 years; She brings a wealth of skill, experience and professionalism; Shelly is incredibly detail oriented and a savvy negotiator.

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  1. June 28, 2014 at 10:08 am

    Do a lot of these errors occur when people file using tax prep software?

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