Realtors Be Careful
Why You Might Be Closer to Tax Fraud Than You Think
So let’s say someone tells you while you are sharing a morning coffee that they are…..
“gonna rob First National Bank tomorrow at 5pm.”
They tell you how they’ll do it and what they’ll wear. They even tell you the car they will drive and all the plans for where they will stash the money.
What if you just sit there? Some people would ya know.
I wonder what happens if you offer to be the driver? How far do you go? Maybe you hold the door open and be the lookout. Are you sure they are even really gonna rob the bank or are they just having fun?
At what point are you no longer an innocent bystander?
Now let’s bring this back to real estate where you know it belongs.
If a client comes to you and says to you
“I’m selling my investment property and I want to do a 1031 exchange into a second home. We’ll probably use it about 90 days a year. I also want to do bonus depreciation and a cost seg.”
If they say it like it is just any regular old thing what do you do next? The reality is, even if someone has a home they think is a 1031 eligible property and they knowthey have stayed in it for 45 to 60 days a years for fun, they are already unqualified for an exchange to the new property. “yeah but everyone does it.” Doesn’t make it right does it?
🎯 Wait, What?
Let’s break down what they just said and what you now know.
They’re using a 1031 exchange which is reserved for investment or business property
They’re buying a second home and planning to use it personally well beyond the rules and the said so. They may even be coming out of a home that is not qualified.
They want to take bonus depreciation and cost segregation, which is reserved for rental properties and business-use assets under special provisions. Perfectly legit but only if done very precisely.
In other words, they’re telling you:
“I’m going to tell the IRS this is an investment property, even though I plan to use it personally.”
Now it is ok to 1031 from a true investment property to another true investment property and under the rules use it as such for a period of time and then later call it your primary home? Sure it is. There is special tax treatment that comes into play. But you followed the rules.
What they are saying whether you are a tax advisor or lawyer is plainly and obviously to a person that has some professional training not the rules. That’s not tax strategy.
That’s a misrepresentation and you, my friend, just became the guy holding the door at First National Bank whether you think so or not. Now comes your integrity check in.
📚 The Actual Law
Under IRC §1031, a tax-deferred exchange only applies to:
“Property held for productive use in a trade or business or for investment.”
It does not apply to personal residences, vacation homes, or “we might rent it later” situations. Of course there are variations on these themes many of which My wife and I have used in our various properties we have owned. But we follow the rules.
There is a safe harbor—Rev. Proc. 2008-16—which allows for limited personal use after two years of bona fide rental activity. But if your client buys the house and moves in for 90 days a year right away? That safe harbor’s not going to save them. If they did it with forethought candidly that is tax fraud.
🚫 A Qualified Intermediary Would Say No
Here’s the kicker:
If a reputable Qualified Intermediary (QI) heard this plan…
“Second home… 90 days a year… cost seg… 1031 exchange...”
They wouldn’t just raise an eyebrow they’d refuse to do the exchange because QIs know their role. I wager to say that most real estate agents do not know why they should default to “I am Not a Lawyer and I am not a CPA.” I wager to say 1,245,678 our of 1,278,980 realtors have no idea what they are really authorized to say and do before the cross a line.
Intermediaries are not just paper pushers. They are part of a regulated process. If they knowingly facilitate a fraudulent exchange, they’re on the hook too.
And that should make you ask if the QI won’t touch it, why the hell would you or I?
🧨 Realtors Aren’t Immune
You might be thinking:
“I didn’t sign their tax return. I just helped them find the house.”
But if you:
Knew what the client was doing
Understood that it didn’t qualify
And still helped structure or close the deal along the way, you are going to at least be deposed.
You’re not clean.
And if you ever said something like:
“Don’t tell the intermediary about the personal use,”
That’s the moment you just stepped over the line straight into:
Conspiracy to commit tax fraud
Aiding and abetting false filings
State licensing violations
Loss of E&O coverage for participating in knowingly illegal activity
No, you're not the mastermind but you helped open the vault and bag the cash. Not cool at all.
💡 How to Stay Smart — and Safe
Here’s what to do when this comes up (and it will come up):
Don’t give tax advice. Say it out loud: “I’m not a CPA or tax attorney.” La la la la la
Document what’s said. Even an email to yourself helps preserve context.
Clarify in writing. Send something like:
“Just to confirm, you mentioned using this as a second home for 3 months a year. Please make sure your CPA confirms whether that works with your 1031 and depreciation plans.”
Don’t participate in fraud. If it feels bad and runs against your internal compass, it probably is not the right thing to do. It’s okay to say no. Oh by the way, this should feel bad and run against your internal compass.
🧠 Final Thought
If you help a client misrepresent their intent with a 1031 exchange especially when they flat-out tell you the truth you are no longer “just the agent.”
You are now a participant even if you think you’re not.
We have a higher standard of care. The deal might not be worth the reputational damage and is certainly not worth the legal risk. We are not attorneys or tax advisors but we are aware of the general rules and have a higher standard of care when engaging with clients. If you disagree with that then you are in the wrong business and if you are working with someone that plays it loose with the rules because you need someone that does, then go for it. We are not your people.
Its kind of the same when you recommend that they “tell the mortgage broker its a true second home” even when you know they are going to rent it full time. You have just become the “cliche” agent. Loose and fast with the rules putting yourself and others at risk for a buck. That is over the red line. Technically that is wire fraud. Be careful and be a realtor but do not go over the lines that you know exist. Do not pretend that “well I am not a tax advisor or lawyer” is a get out of jail free card. It is not.
In the eyes of the IRS, helping someone lie about the use of a property is no different than helping them lie about the price or basis or gain.
And unlike that bank robbery fantasy, this one has your name in the escrow file, on the emails and certainly in the deposed testimony. If they get audited I can assure you they will say “Jimmy said it was ok”. Who is Jimmy? Don’t let it be you!!!
Be smart. Be honest.
And if the QI wouldn’t touch it—neither should you.