Taking Advantage of Reverse Like-Kind Exchanges

The Internal Revenue Service has finally provided a safe harbor for a reverse like-kind exchange. A reverse exchange describes a transaction in which the taxpayer directly or indirectly acquires the replacement property before disposing of the relinquished property. Revenue Procedure 2000-37 provides for the qualification of property as either replacement property or relinquished property for purposes of Section 1031 of the Internal Revenue Code of 1986 ("IRC") if the property is held in a qualified exchange accommodation arrangement ("QEAA").

Property will be considered held in a QEAA and a transaction will qualify for Section 1031 like-kind exchange treatment if all of the following conditions are met:

1. A taxpaying accommodation party must hold qualified evidence of ownership–legal title to the property or other indicia of ownership of the property that are treated as a beneficial ownership of the property–at all times from the date of acquisition of the property by the accommodation party until the property is transferred under No. 5 below;
2. At the time the qualified indicia of ownership of the property are transferred to the accommodation party, it is the taxpayer's bona fide intent that the property held by the accommodation party be involved in a Section 1031 like-kind exchange;
3. No later than five business days after the transfer of qualified indicia of ownership of the property to the accommodation party, the taxpayer and the accommodation party enter into a written agreement which provides that:
4. • the accommodation party is holding the property for the benefit of the taxpayer to facilitate an exchange under IRC Section 1031 and Revenue Procedure 2000-37;
   • the taxpayer and accommodation party agree to report the acquisition, holding, and disposition of the property; and
   • the accommodation party will be treated as the beneficial owner of the property for federal income tax purposes during the period for which it owns the property.
5. No later that 45 days after the transfer of qualified indicia of ownership of the replacement property to the accommodation party, the relinquished property is properly identified in a manner consistent with IRC § 1.1031(k) - 1(c);
6. No later than 180 days after the transfer of qualified indicia of ownership of the property to the accommodation party, (a) the property is transferred (either directly or indirectly through a qualified intermediary as defined in IRC § 1.1031(k) - 1(g)(4)) to the taxpayer as replacement property; or (b) the property is transferred to a person who is not the taxpayer or a disqualified person as relinquished property; and
7. The combined time period that the relinquished property and the replacement property are held in a QEAA does not exceed 180 days.

Permissible Agreements

If the above steps are met, the property will be still be treated as being held in a QEAA if the parties enter into the following arrangements:

• An agreement that the accommodation party serve as the qualified intermediary in a simultaneous or deferred exchange of the property under IRC Section 1031.
• The taxpayer or a disqualified person guarantees some or all of the obligations of the accommodation party, including secured or unsecured debt incurred to acquire the property, or indemnifies the accommodation party against costs and expenses.
• The taxpayer or a disqualified person loans or advances funds to the accommodation party or guarantees a loan or advance to the accommodation party.
• The property is leased by the accommodation party to the taxpayer or a disqualified person.
• The taxpayer or a disqualified person manages the property, supervises improvement of the property, acts as a contractor, or otherwise provides services to the accommodation party with respect to the property.
• The taxpayer and the accommodation party enter into agreements or arrangements relating to the purchase or sale of the property, including puts and calls at fixed or formula prices, effective for a period not in excess of 185 days from the date the property is acquired by the accommodation party.
• The taxpayer and the accommodation party enter into agreements or arrangements providing that any variation in the value of a relinquished property from the estimated value on the date of the accommodation party's receipt of the property be taken into account upon the accommodation party's disposition of the relinquished property through the taxpayer's advance of funds to, or receipt of funds from, the accommodation party.

This new safe-harbor provided by the IRS opens another avenue for deferring tax liability for those who qualify and follows its procedures. With careful planning, taxpayers can accomplish their business goals and defer tax liability.

This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances. Please contact Mark L. Brasee at 402-978-5306 with any specific questions.