IRS Releases Additional Guidance on Reverse Like Kind Exchanges

The IRS has released an additional ruling addressing so-called reverse
deferred or Starker exchanges under Code Section 1031. The IRS ruled in
Technical Advice Memorandum 200039005 that the acquisition of new property prior
to the sale of the taxpayer's old property did not qualify as a Section 1031
exchange. However, this transaction was outside of the recently released safe
harbor for reverse exchanges.

In this ruling, a taxpayer attempted to structure a deferred Section 1031
exchange using a qualified intermediary. When the sale of the taxpayer's
property fell through, he completed the acquisition of the new replacement
property anyway. The taxpayer negotiated the purchase, provided the funds, was
personally liable on the mortgage, but gave title to the property to the
qualified intermediary. When the sale of the taxpayer's old property was
finally consummated, it was done through the intermediary, who then transferred
title to the new property to the taxpayer. The IRS reiterated that a reverse
deferred exchange, one in which replacement property is acquired before the
original property is relinquished, does not qualify under the existing Section
1031 regulations established for forward deferred exchanges.

This transaction occurred prior to the Revenue Procedure that the IRS released
on September 15, 2000 [see Arthur Andersen Real Estate and Hospitality Tax Alert
of that date]. The September 15th ruling established a mechanism to accomplish
reverse exchanges. That Revenue Procedure provided that a taxpayer that complies
with the following guidelines can accomplish a reverse deferred exchange: (1) a
third-party accommodator must hold legal title or similar ownership to the
property; (2) the taxpayer must have a bona fide intent to enter into a 1031
exchange with that property; (3) the taxpayer must enter into a written
agreement with the accommodator within 5 days after the accommodator acquires
the property, pursuant to which the accommodator will be treated as the owner of
the property for tax purposes; (4) within 45 days after the transfer of the
replacement property to the accommodator, the taxpayer must identify the
property he intends to relinquish; (5) no later than 180 days after the
accommodator receives the replacement property, it must be transferred to the
taxpayer; and (6) the combined time period that the replacement and relinquished
property are held by the accommodator cannot exceed 180 days. Moreover, the
Revenue Procedure clarifies that the taxpayer may loan funds to or guarantee
debt incurred by the accommodator to acquire the property.

This new ruling points out that reverse like kind exchanges that are not
structured in strict compliance with the Revenue Procedure will probably not be
respected by the IRS.

For further information on this issue or other planning opportunities, please
contact Tony Brown at (877) 962-2100 or via e-mail at
p.anthony.brown@us.arthurandersen.com

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