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| In a standard section 1031 delayed exchange, a taxpayer first transfers “Relinquished Property” and then acquires “Replacement Property”. However, circumstances may require the taxpayer to reverse the order and acquire Replacement Property before disposing of the Relinquished Property; this is called a reverse exchange. |
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The language of section 1031 does not specifically apply to reverse exchanges. In a standard exchange, the taxpayer has 45 days to identify potential replacement properties and 180 days to actually acquire one or more of the identified properties. Both time limits begin at the close of escrow for the sale of the Relinquished Property. In the preamble to the final regulations on tax-deferred exchanges, the IRS stated that those regulations do not apply to reverse exchanges. The IRS had requested comments regarding the applicability of section 1031 to such transactions. |
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On September 15, 2000, the IRS issued Revenue Procedure 2000-37 which provides a “safe harbor” for completing a reverse exchange. However, because of restrictive compliance rules, not all reverse exchanges will qualify for the safe harbor. If the safe harbor requirements can be met, it will now be possible to achieve tax certainty for a reverse exchange. The safe harbor requirements are: |
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1. Title to either the Relinquished Property or the Replacement Property must be held by an “Exchange Accommodation Titleholder” such as Sonoma Exchange Corporation (SEC). This is referred to as “parking” the property. 2. In addition to an “Exchange Agreement”, the taxpayer and SEC must enter into a “Qualified Exchange Accommodation Agreement”. 3. At the time SEC acquires title, the taxpayer must have bona fide intent that the property held by SEC be either Relinquished Property or Replacement Property in a 1031 exchange. |
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4.
SEC must be treated as the owner of the parked property for all federal
income tax purposes and must report the acquisition, holding, and disposition
of the property on its income tax return. Tax reporting consistency is
a key requirement. Both the taxpayer and SEC must respect SEC’s beneficial
ownership of the parked property for tax purposes. 5.
If the Replacement Property is parked with SEC, the taxpayer must identify
the Relinquished Property no later than 45 days after SEC acquires title. 6. The taxpayer must complete the exchange no later than 180 days after SEC acquires title to the parked property. |
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Compliance with Revenue Procedure 2000-37 will cause SEC to undertake new responsibilities and risks, such as property ownership liability and tax reporting. Accordingly, fees for reverse exchanges will be substantially more than standard exchanges. Even so, SEC’s fees will be among the lowest offered anywhere. Please call 707.938. 0311 for additional information. Sonoma
Exchange Corporation 707.938.0311
voice e-mail: msowell@sonomaexchange.com |
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