Have you ever thought about trying a Section 1031 as a DIY (Do It Yourself) project? If so, you might want to think again. Read on.
A couple in Arizona tried to do it themselves and paid a steep price as a result. They sold a piece of Arizona property for $76,000, took $10,000 of that as earnest money, and the balance was placed in an escrow account with a title company. The couple made any number of mistakes as they planned their DIY exchange. Among them, they neglected to state their intentions to enter into an exchange prior to their sale; their account with the title company did not expressly limit their right to receive, pledge, borrow, or otherwiseobtain the benefits of the cash held in the escrow account; and so on.
The Tax Court wasn't terribly fond of the plan of this Arizona couple. Their tax basis in the property was quite low ($8,500), so there was a rather large gain that the couple sought to defer taxes on, but the Tax Court wouldn't play along. Justifiably so. The IRS makes the process of a 1031 exchange relatively clear, and anyone who employs a reputible, experienced qualified intermediary firm to handle the exchange should find it fairly easy to end up with an easily substantiated exchange. When a taxpayer attempts to do things outside of the safe harbors that the Internal Revenue Code sets out, the result is predictable -- failure.
In this case, the couple was required to recognize the gain of the sale of their Arizona property, resulting in tax of $14,475 plus penalty of $2,895 -- a total of $17,370 in an apparent attempt to avoid a fee from a reputible QI company. Ouch.
Don't make that mistake. Seek out an established intermediary with client references; one who belongs to and supports the association for the exchange industry, the Federation of Exchange Accommodators.
(If you're into these sorts of things, here's the citation for the info on this case direct from the IRS.)
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