Changes in Civil Tax Penalties for 1031 Exchanges

PAST. In the past, a taxpayer could avoid the "20% understatement of tax" penalty if the taxpayer relied on the advice of a professional, and that advice was the cause for the error in the 1031 exchange.

PRESENT. Recent changes in tax law and Circular 230 have further narrowed the circumstances under which a taxpayer can rely upon the written advice of a tax professional to avoid civil tax penalties.

WHAT IS DIFFERENT? In order for a taxpayer exchanging property pursuant to Section 1031 to be protected from 20% civil tax penalties under Section 6662, the taxpayer must reasonably rely upon a written qualified tax opinion of a tax expert.

WHAT IS A QUALIFIED TAX OPINION? A qualified tax opinion must:

• Be written by a professional advisor, who is an expert in Section 1031 and any other relevant areas of federal tax law.
• Be based on all the pertinent facts and the laws as it relates to the facts.
• Include advice, which must not be based on any unreasonable assumptions of fact or law, or unreasonably rely upon the representations of the taxpayer.
• Clearly state that there is a greater than 50% likelihood that the tax treatment will be upheld if challenged by the IRS, without taking into account that the return will not be audited, the issues will not be raised on audit, or that the issue will be settled.

CAN ALL ADVISORS GIVE TAX OPINIONS TO THE TAXPAYER? Advisors, in order to comply with Circular 230, must either:

• Use a Tax Expert in Section 1031 exchanges and Federal Tax Law employed by the Firm to provide a tax opinion for each Section 1031 exchange; or
• Delegate this function to an outside Tax Expert in Section 1031 exchanges and Federal Tax Law, such as Strategic Property Exchanges.

WHAT IS THE PENALTY FOR NON-COMPLIANCE? The penalty for non-compliance under Circular 230 is censure, suspension, disbarment and monetary penalties.

This is where we, at STRATEGIC PROPERTY EXCHANGES, LLC, can help you and your clients. As a full time practicing tax attorney and a Board Certified Federal Tax Specialist, we can provide your clients with a covered tax opinion, which will provide civil tax penalty protection for your clients, and will provide Circular 230 protection for you and your firm.

Stephen L. Robison, J.D., LL.M.





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More than just commercial property can be exchanged in a 1031 process. To learn more about the other items, read our page on What can be exchanged?