A Case That Illustrates What Not to Do in a 1031 Exchange

We talk a lot about what you should do to ensure the success of your 1031 exchange. Today, let’s look at a case that illustrates what you should not do in the course of a 1031 exchange.

What Not to Do

The case in question is Florida Industries Investment Corporation and Subsidiaries v. Commissioner. This is a case that occurred before the safe harbors for qualified intermediaries existed. In this case, the taxpayer used a quasi-intermediary. Unfortunately, the taxpayer was still the puppet master. The taxpayer was writing out old checks for his attorney friend to sign in the capacity of the 1031 exchange escrow agent. When extra monies were sent off for closing and there were additional funds that should have come back to the 1031 escrow agent, those funds did not come back. The taxpayer really didn’t adhere to the terms of their own escrow agreement. In essence, they were playing fast and loose, and the IRS claimed that the exchange was not legitimate.

Key Takeaways

Here are some key takeaways from this case as it relates to 1031 exchanges:

  • Don’t use a patsy as your qualified intermediary in a 1031 exchange.

  • Adhere to the terms of your exchange agreement.

  • If there’s extra money that goes off to a closing, have it returned to the intermediary. Don’t give it to the taxpayer conducting the exchange.

Like-Kind Exchanges of Real Property

Like-kind exchanges of real estate are a vehicle by which taxpayers can defer their capital gains taxes when selling qualifying real estate and reinvest those proceeds into a bigger investment property. This allows one to keep their money compounding and growing over time. At CPEC1031, LLC we help taxpayers with 1031 exchanges under section 1031 of the Internal Revenue Code. Our team of professionals can assist you with all of your 1031 exchange needs. Contact us today to learn more about the like-kind exchange process and how we can be of service to you.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

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