1031 New Developments
Tax Reform Unified Framework
Over the last several years there have been numerous
proposals that might eliminate or curtail the availability
of Section 1031. In reviewing the Senate tax proposal
there is nothing specific to 1031. We are monitoring all
legislation for anything pertinent to the future of 1031.
Our industry will continue to communicate with decisionmakers regarding
how tax deferred exchanges support investment in the American
Non-Safe Harbor Reverse Exchanges - IRS Non-acquiescence
The IRS issued Revenue Procedure 2000-37 providing a safe
harbor for reverse exchanges. The provisions of this are relatively userfriendly
allowing the Taxpayer to acquire replacement property, first, using
an Exchange Accommodation Titleholder ("EAT") and sell the relinquished
property later. Most exchange companies are willing to serve as the EAT;
temporarily owning either the replacement property or the relinquished
property. We refer to this as a "parking" arrangement. The one negative of
this revenue procedure is the fact that the EAT may only hold the property
for 180 days during which the Taxpayer needs to get the relinquished
property sold and closed.
The question - Is there a way to structure a reverse exchange to
extend beyond the 180 days of the safe harbor? The generally held belief
is that to do so the EAT needs to have some benefits and burdens of
ownership in the property.
Last year the US Tax Court decided a case in which the exchange
company held the property for 17 months. Estate of George H. Bartell, et
al. v. Commissioner, 147 TC 5 (June 6, 2016). This was a case out of
Washington State and the facts of that case arose before issuance of the
revenue procedure in 2000. While the EAT owned the property all benefits
and burdens ran to the Taxpayer. The EAT merely held title. The Court
allowed the exchange. The Court held that the EAT was not the Taxpayer's
agent and did not apply the benefits and burdens test as argued by the IRS.
You didn't hear much about it from us because we, and many others in our
industry, were skeptical about the decision. Could we immediately start
structuring reverse exchanges in this manner? We watched to see if the
IRS would appeal and they didn't.
The IRS has now issued an action on decision (AOD 2017-06)
stating that they will not follow court opinions which uphold a non-safe
harbor reverse exchange without regard to whether the EAT has benefits
and burdens of ownership.