And Why an Independent Exchange Review Matters More Than Ever

Most people assume that if a 1031 exchange is handled by a large, well-known accounting firm, it will be reported correctly. That assumption is understandable—and often wrong.

Who Are the “Big Four”?

The “Big Four” are the four largest international accounting firms. They are massive organizations, well known for public accounting, auditing, tax, and advisory work. Their clients range from global corporations to high-net-worth individuals.

Recently, we reviewed an exchange for a client whose tax return had been prepared by one of these firms. I won’t name which one. It wouldn’t be slander, but it would almost certainly result in a lawsuit—and the name doesn’t matter anyway.

What matters is what happened.

A Real-World Example of a Simple Exchange Done Wrong

This client completed a 1031 exchange in 2022. When his 2022 tax return was filed in 2023, the return showed approximately $130,000 of boot, resulting in a tax bill of about $35,000.

Here’s the problem:

He didn’t have any boot at all.

Most of that $130,000 was money deposited into escrow to pay the seller’s selling expenses. This is a common practice, often used to help reduce property taxes by lowering the reported selling price. The preparer misread the closing statements and treated those escrow deposits as taxable boot.

That single misunderstanding created a completely unnecessary tax bill.

This type of error stems from a fundamental misunderstanding of how “cash received,” selling expenses, and boot are defined and reported under IRC §1031 and Form 8824. It is not a gray area. It is a technical reporting issue.

The Problem Didn’t Stop There

Unfortunately, the same preparer also created a depreciation schedule for the replacement property using the entire purchase price, instead of applying the correct carryover basis and trade-up basis rules.

As a result, for the last three years, the client has been claiming roughly triple the depreciation he is entitled to.

If this is ever examined, the consequences would be significant. The IRS would likely require a §481 adjustment, forcing the client to recognize years of excess depreciation as income—with no cash to pay the resulting tax.

Why This Happens More Often Than People Think

I’ll be honest—I almost didn’t review this exchange. It looked too simple to be done incorrectly.

But this experience mirrors what we see every week.

We review more and more exchanges prepared by other tax professionals, and the percentage that require correction consistently hovers around 80%.

I realize that number sounds hard to believe. Even I sometimes feel like the boy who cried wolf when I say it out loud. I would love to be able to say the number is 40%, or even 30%.

Unfortunately, based on what we actually see, that simply isn’t the case.

Most tax professionals do very few 1031 exchanges in their careers. As a result, they don’t develop practical experience interpreting escrow statements, calculating cash received, identifying true boot, or applying basis rules correctly. These are not academic issues—they directly affect how much tax a client pays and how much risk they carry forward.

Why We Do What We Do

Exchange Planning Corporation provides a service that, as far as we know, no one else in the industry offers in this form.

We help clients—and their tax professionals—report exchanges correctly.

This is not theoretical work. Every day, we see the real-world consequences of incorrect reporting, and we see the difference accurate reporting makes. In roughly 75% of incorrectly reported exchanges, the taxpayer has actually overpaid tax.

Our goal is not to replace anyone’s CPA. Our goal is to raise the standard of exchange reporting across the entire ecosystem and to make sure completed exchanges are defensible, accurate, and consistent with the tax law.

If you know someone who has completed an exchange in the past, recommending a review could save them real money—and prevent serious problems down the road.

If you would like to talk about how you can help, and how you and your clients can benefit, please contact us anytime.

Frequently Asked Questions

1. Why are so many 1031 exchanges reported incorrectly?

Most tax professionals handle very few exchanges. As a result, they often misinterpret escrow statements, misclassify selling expenses as boot, or apply incorrect basis and depreciation rules under IRC §1031 and related IRS guidance.

2. What is the most common reporting mistake you see?

The most common error is treating escrow deposits or selling expenses as taxable boot. These amounts are frequently misread on closing statements and incorrectly reported on Form 8824, creating tax that was never owed.

3. Can incorrect exchange reporting increase audit risk?

Yes. Errors involving boot, basis, and depreciation often compound over time. Incorrect depreciation schedules can result in significant §481 adjustments if examined, creating large tax liabilities without corresponding cash.

4. Is an exchange review only useful if tax was overpaid?

No. While many reviews uncover overpaid tax, others identify underreported gain or excessive depreciation. Correcting either issue early reduces future exposure and prevents much larger problems later.

5. Does Exchange Planning Corporation replace my tax preparer?

No. Exchange Planning Corporation works alongside your existing tax professional. We provide specialized 1031 analysis, calculations, and reporting support so the exchange is reflected accurately and defensibly on the tax return.