Will a 1031 Exchange Increase the Risk of Audit?

The dreaded IRS audit. Nothing ratchets up the stress levels like receiving a letter in the mail telling you you’re going under the tax man’s microscope. Not surprisingly, this is a fairly common topic raised by investors considering a 1031 exchange. They usually wonder if conducting an exchange will increase their risk of IRS audit.

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 come your way.

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