You are exactly right. In cases of obvious basis shifting to avoid tax on gain, the exchange will be disallowed and the tax will become due (plus any potential penalties or interest). I believe sage advice for any taxpayer considering a 1031 exchange is to rely on competent counsel to ensure their transaction meets all the strict guidelines of a 1031 exchange. As a Qualified Intermediary, my firm is disallowed from providing tax advice, however we regularly work with attorneys and CPAs to ensure their clients’ exchanges are structured properly.

Jim Burnett
Director, Business Development
Accruit, LLC
http://www.accruit.com