Tuesday, January 17, 2012

Top 1031 Exchange Audit Topics Identified in California

Recently, it was reported that 1031 exchanges continue to be one of the top audit topics for the California Franchise Tax Board (“FTB”).  Although these items relate to audits conducted by the State of California, it is applicable on a much larger scale since virtually all states (and the Federal government) are “cash strapped” and are looking for sources of revenue.

The FTB identified the following as being among the most common issues in their audits of 1031 exchanges:
  1. Failure to make a proper identification or comply with other technical requirements of Section 1031;
  2. That the relinquished and/or replacement property are not held for a qualifying purpose (held for investment or productive use in a trade or business). For example, the property is used for personal purposes or it is held primarily for sale;
  3. The taxpayer who sells the relinquished property is different from the taxpayer who acquires the replacement property; and
  4. The taxpayer receives non qualifying property in the exchange (boot), but fails to report it on their tax return.
Using a qualified exchange intermediary can help avoid these and other issues.  Information courtesy of ipx1031. Learn more at: www.ipx1031.com.