In prior newsletters, we’ve covered the basics of a 1031 Reverse Exchange, i.e. how a Taxpayer can defer taxes on gain in a like-kind exchange when the Taxpayer is acquiring its new property (Replacement Property) before the Taxpayer is able to dispose of its old property (Relinquished Property). A Taxpayer with interests in multiple entities, each owning one or more properties, any one of which could be the property that the Taxpayer intends to exchange for its Replacement Property, should be aware of IRS Ruling 201242003.

In this Ruling, the IRS examined a situation where the Taxpayer and its wholly-owned affiliate both owned several multi-family buildings, any of which could be the Relinquished Property exchanged for the Replacement Property. The IRS ruled that it was permissible for both the Taxpayer and its affiliate to enter into a qualified exchange accommodation arrangement (QEAA) with an LLC which was specifically created to hold title to the Replacement Property (EAT), pending the sale of the Relinquished Property.

The IRS held that the EAT could enter into a QEAA with more than one entity related to the Taxpayer, provided that both the Taxpayer and its related entities had bona-fide intent to acquire the Replacement Property for their respective exchanges. In this case, the Taxpayer and its entities represented in their QEAAs such an intent and also agreed that once the EAT received notice from either the Taxpayer or its affiliate(s) that the noticing party intended to acquire the Replacement Property from the EAT, the other entity’s right to the Replacement Property was terminated.

Since Taxpayers have 45 days from the time the EAT acquires the Replacement Property to identify their Relinquished Property, and since real estate investors often hold their properties in different entities, this Ruling provides taxpayers with flexibility in setting up their Reverse Exchanges, provided that the 1031 Reverse Exchange documents are correctly drafted to meet the IRS requirements discussed above.

“This information is for educational purposes only and not intended to constitute legal advice. Every project and property is unique. Please seek legal counsel for advice specific to your project.”