In a recent report by the Department of the Treasury's Inspector General for Tax Administration it was determined the increasingly popular "like-kind" exchanges referred to as 1031 Exchanges require greater oversight to ensure taxpayer compliance.

Section 1031 of the Internal Revenue Code as been part of the Internal Revenue code for over 5o years but was little used until the 1970's when real estate investors began to take advantage of its provision allowing "like-kind" exchanges to defer (not avoid) payment of taxes on capital gains. By its own admission the Treasury's report indicates deferring capital gains through the exchange of like-kind property is growing in popularity.

The synopsys of the Treasury report states, "In a recent report, the Government Accountability Office (GAO) stated that, in reviewing securities reporting compliance, it found taxpayers had misreported 'capital gains for other assets,' including residential rental property, business personal property and real estate. The report identified 'capital gains for assets other than securities' as an area of individual taxpayer noncompliance that is a promising target for additional research to improve reporting compliance. We agree with the GAO that this area poses risks that need to be addressed."

The report goes on to state "the dollar amounts deferred have more than tripled from approximately $22.8 billion in 1998 to more than $73.6 billion in 2004...with individual taxpayers accounting for 39 percent of gains (or losses) deferred." Rest assured if the IRS feels there is under reporting or non-compliance with reporting requirements this will become an audit area.

You heard it hear first! So, do the right thing. If you have exchanged or plan on doing an exchange by all means do so. BUT, please make sure to use a reputable qualified intermediary and along a certified public accountant to ensure you are fully compliant in the transaction.

To read the full report visit the Treasury Inspector General's Audit Report - Reference 2007-30-174.