“I’m Buying a Beach House… and Robbing a Bank”
Be Careful not to Get Too Excited about New Tax Rules
Realtors Be Careful
Why You Might Be Closer to Tax Fraud Than You Think
So let’s say someone leans in during your morning coffee and casually says:
“I’m gonna rob First National Bank tomorrow at 5pm.”
They tell you how they’ll do it. What they’ll wear. What car they’ll drive. Where they’ll stash the money.
Now imagine you just sit there.
You nod, maybe offer to drive. Maybe you hold the door open. Maybe—because you’re polite—you ask if they need help counting the money afterward.
At what point are you no longer a bystander?
Now let’s bring this back to real estate.
A client comes to you and says:
“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.”
And they say it like it’s just a regular Tuesday.
🎯 Wait, What?
Let’s break down what they just said:
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
They want to take bonus depreciation and cost segregation, which are reserved for rental properties and business-use assets
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.”
That’s not tax strategy.
That’s a misrepresentation.
And you, my friend, just became the guy holding the door at First National Bank.
📚 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.
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.
It’s not even close.
🚫 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.
They’re not just paper pushers—they’re 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?
🧨 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...
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.
💡 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.”
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. Please make sure your CPA confirms whether that works with your 1031 and depreciation plans.”
Don’t participate in fraud. If it smells bad, it probably is. And it’s okay to say no.
🧠 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. Its kind of the same when you recommend that they “tell the mortgage broker its a true second home”. That is also 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.
Because 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 sometimes in the recorded deed.
Be smart.
Be honest.
And if the QI wouldn’t touch it—neither should you.