The IRS is said to be increasing its audits and enforcement of 1031 exchanges during 2008. If you are considering using this accounting option to minimize the amount of capital gains taxes owed, it will be best to get the best advice possible on how to do it right.

For a little background, when a real estate owner sells piece of investment property, the taxpayer must pay a tax on any profit that is made. If the property was owned for more than one year, it will normally be considered a long-term capital gain and the tax will be based on the seller’s income. Subject to current IRS statutes, the highest tax rate is 15 percent.

However, if the property is “sold” in connection with a 1031 exchange and another investment property worth the same amount is used as swap, there would be no capital gains tax to be paid. Instead, the basis of the old property would be transferred to the new one. The tax on any profit will not be due until the replacement property is sold.

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