The safe harbor transactions fit within the parameters of the safe harbor created in September 2000 by Revenue Procedure 2000-37 and governs those transactions in which the property is parked no longer than 180 days. However, there are instances in which, for a number of reasons, the replacement property must be parked for longer than 180 days. Common examples are those in which the relinquished property will take longer to market and sell than 180 days or in which construction of improvements are required on the replacement property.
While Revenue Procedure 2000-37 does not cover so-called non-safe harbor transactions, it takes the position of no negative inference merely because certain structures are pre-approved due to the safe harbor:
Further, the Service recognizes that 'parking' transactions can be accomplished outside of the safe harbor provided in this revenue procedure. Accordingly, no inference is intended with respect to the federal income tax treatment of 'parking' transactions that do not satisfy the terms of the safe harbor provided in this revenue procedure, whether entered into prior to or after the effective date of this revenue procedure.
Some exchangers mistakenly believe that if a parking period extends past the 180-day deadline they can somehow allow the transaction to keep running and simply conclude their exchange without any adverse consequences. This approach to “blown” safe harbor deals has apparently found some support in a recent court case, Bartell v. Commissioner, 147 T.C. No. 5, decided August 10, 2016. In Bartell, the U.S. Tax Court ruled, among other things, that even though the taxpayer entered into what was essentially a safe harbor transaction on August 1, 2000 and the parking period lasted until December 31, 2001, the taxpayer’s 1031 exchange should not have been disallowed by the IRS.
In Bartell, the court overlooked the 17-month timeline even though the property was purchased by an exchange facilitator with loan funds secured by the taxpayer, the taxpayer managed the construction portion of the deal and the taxpayer was in possession of the property during the parking period. It is clear the parking entity did not really have any true benefits and burdens of ownership. Accruit believes the Bartell case should not be relied on in current similar situations for a number of reasons including the facts that the parking transaction was commenced prior to the issuance of Rev. Proc. 2000-37, it originated in the taxpayer friendly 9th Circuit and, most importantly, the IRS has since made it clear they will not acquiesce to the decision as precedent in other cases.
When, for any number of reasons, more than 180 days is required, the best approach may be to utilize what is referred to as a non-safe harbor reverse exchange which is specifically structured to last longer than 180 days and create true benefits and burdens of ownership in the parking entity. Since these are not typical parking arrangements, each transaction must be structured differently based upon the facts presented. The taxpayer’s CPA’s, attorneys and other advisors working for the taxpayer need to be involved in the process. Accruit has the necessary experience and expertise to assist the taxpayer and all of the other essential parties to the exchange process in navigating transactions outside the safe harbor.