I recently and unexpectantly sold a rental and then 9 days later bought another rental that I had been planning but wasn’t sure if it was going to make it to sale. The rental I sold resulted in no money being tranfered to me since I had re-financed it. I had a net gain of $7,000 but again no money changed hands due to the financing even though there was a gain. My CPA thinks we could convince the IRS it fits a 1031 exchange if I were audited and the penalty is $100 to $300. Can anyone with some experiance give me some advice?
I think that I would be a little careful in your dealings with this CPA. The federal law regarding 1031 exchanges is fairly strict.
You have exactly 45 days (including Sundays and holidays) from the closing of the old property to identify a list of possible replacement properties and 180 days to purchase one or more of those properties.
For an exchange to be 100% tax deferred, you must acquire new property that is of equal or greater value than the old property; you must also spend all of the net proceeds from the old property in purchasing your new property.
The funds from the sale of the old property must be held by a qualified intermediary (QI). You must never have touched the money. The money has to come directly from escrow (or the seller if there was no escrow) to the QI. The QI cannot have been your agent for the past two years. You might want to do a search on the Internet for “1031 exchanges”. There is much good information to be found there.
I am unsure of the penalties but if you are audited the IRS will probably disallow any tax advantages and will probably flag you for future audits.
1031 exchanges cannot (absolutely cannot) be accomplished AFTER the transaction!
And, as Teksh has said, the rules are not simple but are very specific.
Your CPA is giving you abyssmal advice and should stick to things he knows something about…