The Treasury Inspector General for Tax Administration recently issued a report raising concerns about taxpayer compliance with the like-kind (Section 1031) exchange rules. It is likely that this report will eventually result in greater IRS scrutiny of reported Section 1031 exchanges. The following concerns were mentioned, and thus such issues may garner more scrutiny in regard to such reviews:
-transactions involving property that is not "like-kind;"
-incorrect basis figures, especially upon ultimate disposition of property acquired in the exchange;
-related party exchanges; and
-exchanges involving second homes or vacation homes.
You can read the report here.
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