Is an Audit More Likely If You Do a 1031 Exchange?

Audit. The mere word conjures up sweaty palms and a racing heartbeat. Opening your mailbox to find a letter from the #IRS is stressful enough. Opening it and discovering you’re subject to an audit takes stress to another level.

Not surprisingly, investors considering a #1031 exchange are often concerned that doing so might increase their risk of the dreaded IRS audit. But is that true?

While I don’t have a crystal ball to predict what triggers an audit, in my two decades of working with investors to facilitate 1031 exchanges, I can say with confidence that the risk of audit doesn’t appear to be any greater with an exchange than if you simply sold the property outright.

Section 1031 has been part of the Tax Code since 1921. In short, the law allows you to defer taxes until the property is ultimately sold and you receive cash. So conducting an exchange should not expose you to an increased risk of audit.

Of course, there is always an exception to this general assumption. However, if you follow the rules and guidelines set forth by the IRS, you should be well protected even if an unpleasant audit does arise.

If a 1031 exchange is in your future, please contact me to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.