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2001 On-line Tax Planning Like-Kind ExchangesStructuring real estate transactions to qualify for tax deferral under Section 1031 (of the Internal Revenue Code of 1986, as amended) has been one of our favorite tax planning techniques for years. Typically, the Relinquished Property transaction is ready to close before the Exchanger has found the appropriate Replacement Property. As you know, the Exchanger has 45 days after the closing of the sale of the Relinquished Property to identify the Replacement Property(ies), and 180 days to close on the acquisition of the Replacement Property(ies). In order to facilitate the qualification of the transaction, we have a Qualified Intermediary ("QI") hold the funds from the sale of the Relinquished Property until identification and closing on the Replacement Property can be consummated. Occasionally, the ordering of the two transactions occurs in reverse. The Exchanger is prepared to acquire the Replacement Property before he is able to dispose of the Relinquished Property. IRS has never provided any significant guidance on how these "reverse exchanges" under 1031 should be structured. This silence changed with the recent issuance by IRS of Revenue Procedure 2000-37. In the Rev. Proc., IRS provided "safe harbors" by which reverse exchanges will be qualified under 1031. The first rule is that the Exchanger cannot hold title to both properties simultaneously. Therefore, a QI must be engaged to hold title to the Replacement Property until the sale of the Relinquished Property is closed. Secondly, the closing of the sale of the Relinquished Property must occur within 180 days of the "parking" of the Replacement Property with the QI. If the details of Rev. Proc. 2000-37 are strictly implemented, then the transaction will qualify under 1031 without challenge. Accordingly, any arrangements between the Exchanger and the QI can be without economic effect. For example, you could use interest free loans to the QI, or triple-net leases with zero rent. This guidance is a significant development, which allows us to properly structure reverse exchanges without audit risk. On a related note, we recently discovered that a market exists in which Exchangers can buy fractional interest in large real estate rental projects and the acquisition of these fractional interests in connection with the disposition of Relinquished Property will qualify under 1031. We know very little about the underlying investments and give no opinion or recommendation with respect to the quality or risk of the investment. We merely mention it to clients as an alternative to acquiring a 100% fee interest in Replacement Property. The source of our knowledge of these fractional interest investments is from an affiliate of Chicago Title Company. We can provide you with more specific information if the need arises. As always, we remain available to assist you with your needs in structuring delayed or reverse exchanges under Section 1031.
Bucheri McCarty & Metz LLP
Telephone: (765) 236-2300 |
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