Fairhaven Realty
Fairhaven Realty, a br of Lakeway Realty, Inc.
Q & A 1031 Tax Exchanges
Posted on February 18, 2010
What a beautiful day this Thursday, February 18, 2010 is in Bellingham, WA. The weather report indicates more of the same-even through the weekend!
QUESTIONS AND ANSWERS ON 1031 TAX EXCHANGES (continued from previous blogs).
What is a reverse exchange?
A reverse exchange, sometimes called a “parking arrangement,” occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. A “pure” reverse exchange, where the taxpayer owns both the Relinquished and Replacement properties at the same time, is not allowed. The actual acquisition of the “parked” property is done by an Exchange Accommodation Titleholder (EAT) or parking entity.
A reverse exchange, sometimes called a “parking arrangement,” occurs when a taxpayer acquires a Replacement Property before disposing of their Relinquished Property. A “pure” reverse exchange, where the taxpayer owns both the Relinquished and Replacement properties at the same time, is not allowed. The actual acquisition of the “parked” property is done by an Exchange Accommodation Titleholder (EAT) or parking entity.
Is a reverse exchange permissible?
Yes. Although the Treasury Regulations still do not apply to reverse exchanges, the IRS issued “safe harbor” guidelines for reverse exchanges on September 15, 2000, in Revenue Procedure 2000-37. Compliance with the safe harbor creates certain presumptions that will enable the transaction to qualify for Section 1031 Tax-deferred Exchange treatment.
Yes. Although the Treasury Regulations still do not apply to reverse exchanges, the IRS issued “safe harbor” guidelines for reverse exchanges on September 15, 2000, in Revenue Procedure 2000-37. Compliance with the safe harbor creates certain presumptions that will enable the transaction to qualify for Section 1031 Tax-deferred Exchange treatment.
How does a reverse exchange work?
In a typical reverse (or “parking”) exchange, the “Exchange Accommodation Titleholder” (EAT) takes title to (“parks”) the replacement property and holds it until the taxpayer is able to sell the relinquished property. The taxpayer then exchanges with the EAT, who now owns the replacement property. An exchange structured within the safe harbor of Rev. Proc. 2000-37 cannot have a parking period that goes beyond 180 days.
What happens if the exchange cannot be completed within 180 days?
If a reverse exchange period exceeds 180 days, then the exchange is outside the safe harbor of Rev. Proc 2000-37. With careful planning, it is possible to structure a reverse exchange that will go beyond 180 days, but the taxpayer will lose the presumptions that accompany compliance with the safe harbor.
*Information gathered/quoted from the National Association of REALTORS® online library-1031 Exchange-FEA (Federation of Exchange Accommodations)
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