Sell an Investment and Pay No Taxes with a 1031 Exchange

Sell an Investment and Pay No Taxes with a 1031 Exchange

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Internal Revenue Code Section 1031 is one of my favorite code sections.  That is saying something coming from a tax geek like myself.  What is a 1031 exchange? Generally speaking, a 1031 exchange is a swap of one business or investment asset for another.  If you follow the 1031 rules, you’ll either have no tax or limited tax due at the time of the exchange which allows your investment to grow tax deferred.  The rules can get complicated so the following are some things you should know if you are considering an exchange.

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IRS Audit Red Flags

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Image Courtsey of Sean Cunningham on Flickr

Many clients are concerned about “red flags” that can trigger an IRS audit.  Since the IRS audits less than one percent of all individual tax returns annually, the odds are pretty low that your return will be chosen for review.  I believe that you should take every legitimate deduction that is available to you, so I am not suggesting that you pay more in taxes than you should just to avoid the small risk of a potential audit.  That being said, the presence of the following factors in your return increases the chances that the IRS will come calling.

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