Common Malpractice Issues in Section 1031 Exchanges

One of the most common mistakes made in a Section 1031 Exchange involves disqualified parties to the Exchange. A disqualified party cannot serve as the Qualified Intermediary in a Section 1031 Exchange.

• If the Qualified Intermediary is disqualified, the 1031 exchange fails and the client is taxed on the gain from the property sold.
• If the sale was reported as a proper 1031 Exchange, the IRS has treated such Exchanges as fraudulent, and subjected the taxpayer to increased civil fraud penalties, criminal tax penalties, and/or imprisonment.
• The Advisor/Qualified Intermediary would be subject to a professional tax malpractice claim for having violated the federal tax rules on Section 1031 Exchanges.
• Over the past five years 80% of all reported tax malpractice is committed by non-tax professionals.

Who are these disqualified persons?

Any person who has provided services as an employee, attorney, accountant, banker or real estate broker in the 24 months prior to the taxpayer's sale of his or her relinquished property is treated as a disqualified person at the time of the transaction. Any person who is related to the taxpayer, either by blood or by a business relationship, cannot serve as Qualified Intermediary.

How does this happen?

• In the case of a title company, many times the real estate attorney, who is engaged to investigate the title of the property to be sold, or is the closing agent for the sale, will also attempt to serve as the Qualified Intermediary. If the attorney is paid a legal fee in conjunction with the sale that is not related to the Exchange, such as deed preparation, this can cause the Exchange to fail.
• Where a professional firm has a pre-existing relationship with a client during the 24 month period prior to to the exchange, any firm member, acting as the Qualified Intermediary, will invalidate the Exchange. This happens often when the advisor wants to keep tight control of the client. A recent case involved this issue where a very large firm acted as the Q.I. for a long time client and exposed the firm to a multi-million dollar malpractice case.
• In each situation the firm risked more than they could afford to lose because the fee they earned was miniscule compared to the taxes that were paid.

Strategic Property Exchanges provides a qualified tax opinion, in each Section 1031 Exchange, in conformity with Treasury Regulations, which specifically provide that an independent tax attorney can provide a tax opinion, in connection with a Section 1031 Exchange, to carry out the Section 1031 Exchange transaction.

Our service guarantee includes:

1. A tax opinion, which protects the taxpayer from IRS penalties.
2. Errors and Omission insurance protects the taxpayer from any mistakes that we might make as a Qualified Intermediary.
3. Fiduciary bond insurance protects the proceeds from the sale. Only 2% of all Intermediaries carry fiduciary insurance.
4. Our tax opinion protects you and your firm from tax malpractice.

Let us assist you grow your business and maintain your client relationship. You are the hero in your client's eyes because you have brought into the Exchange a Qualified Intermediary who is an expert on 1031 Exchanges as well as a Board Certified Federal Tax Expert.

Call us regarding any questions you may have regarding a potential Section 1031 Exchange at (513) 412-3481 or emailus at steve@spe1031.com.

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





Do you know a colleague or co-worker that would benefit from our newsletter. Refer them to our newsletter subscription page.




-Don't risk more than you can afford to lose

-Consider the odds

-Don't risk a lot for a little






If you are interested in obtaining additional information covering all aspects of signing up for one of our monthly newsletters, please visit our newly designed website at www.SPE1031.com.






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?