Did You Buy Substantially The Same Property That You Identified In Your 1031 Exchange?

I know, I know.  You are wondering what I've been drinking.  But, this is a real issue.  In fact, It is a really critical issue when you are being audited.

It does in fact come up during income tax return audits, especially when the California Franchise Tax Board is the audit agency.  The California Franchise Tax Board has been taking very hard look at just this issue.  We've been brought in as 1031 Exchange experts on audit cases for this very issue. 

Actual Case Study
Let's look at an audit case that we recently consulted on.  The investor/taxpayer sold a property ("relinquished property") and structured a 1031 Tax Deferred Exchange transaction.  The investor/taxpayer identified his intended purchase ("replacement property") within the required 45 calendar day identification period.

His identification read like this: 12345 Main Street, Anytown, CA 92345

He made an offer, which was accepted, to buy an undivided ten percent (10%) interest in his identified property, and he actually closed on the purchase of the fractional interest well within his 180 calendar day exchange period.

Acquiring Substantially The Same Property
The issue is this, by identifying the property as 12345 Main Street, he has effectively identified 100% of the property as his intended replacement property.  However, he only acquired a ten percent (10%) interest in the property. 

The question then becomes, did he actually acquire substantially the same property as the property that he identified if he only acquired ten percent (10%) of what he actually identified. 

I know, I know, this is like splitting hairs.  But, the California Franchise Tax Board is taking this very position right now.  They have disqualified the 1031 Exchange under audit because he did not acquire substantially the same property that he identified. 

Investors/taxpayers structuring 1031 Exchanges must be very, very careful when identifying their intended like-kind replacement properties so that they do not run afoul of the hyper-critical taxing authorities today.