Real Estate

IRS Issues Long Awaited Reverse Exchange Rules

During the one-year period between the promulgation of the 1990 proposed exchange regulations and the issuance of the final regulations in April of 1991, the IRS solicited comments in regard to allowing pure reverse exchange transactions. A pure reverse exchange was understood to mean that the taxpayer would acquire the replacement property prior to the sale of the relinquished property. The final regulations ultimately failed to allow a safe harbor for such a reverse closing sequence.

Section 1031 Tax Deferred Exchanges - A Review of the Final Regulations

Tax deferred exchanges of real estate have been recognized by the Internal Revenue Code since the 1920s. A variety of factors have converged the past several years leading to a dramatic increase in the popularity of tax deferred exchanges as an alternative to real property sales.

Kreisers Inc. v. First Dakota Title Limited

Kreisers Inc. hired First Dakota Title to assist it with a property exchange in order to receive tax deferred benefits under 26 U.S.C. § 1031. After a partial failure of that exchange, Kreisers sued First Dakota for negligence and negligent misrepresentation.

Internal Revenue Code Section 1031

Under Internal Revenue Code (IRC) section 1031, no gain or loss is recognized when companies sell business or investment property and acquire property that is like-kind. A transaction that is structured as a tax-deferred exchange is generally referred to as a "like-kind exchange" or an "LKE". Equipment dealers, car rental companies, and other organizations that routinely dispose of business assets can realize substantial benefits from an ongoing program of exchanges (referred to as an LKE Program).

Deferred Exchanges: Avoiding Traps for the Unwary

Tax-deferred exchanges of real estate have been recognized by the Internal Revenue Code since the 1920s. Recently, various factors have converged leading to a marked increase in the use of tax-deferred exchanges as an alternative to outright real property sales. Two of the principal factors resulting in the current popularity of tax-deferred exchanges are the increase in the maximum capital gain rate and the practical implications of the legal decision in Starker v. United States. Although simultaneous exchanges had been employed for a long time, the landmark Starker case opened a window of opportunity for valid exchanges on a nonsimultaneous basis.

Understanding Tax-Deferred Exchanges of Real Estate

The concept of tax-deferred exchanges is quite simple: If one trades property for like-kind property and does not receive any cash or other non-like-kind property, then no profit has been made, and there are no immediate tax consequences. While the basis in the replacement property is affected, any gain is deferred until the eventual sale of the replacement property.

Tax-deferred exchanges of real estate and personal property have been recognized by the I.R.C. since the 1920s, and regulations introduced in 1991 made structuring such transactions easier.

Rev. Proc. 2008-16: Exchanges of Vacation Homes and Rental Property

This revenue procedure provides a safe harbor under which the Internal Revenue Service (the “Service”) will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of § 1031 of the Internal Revenue Code.

Rev. Proc. 2000-37: Reverse Exchanges

Since the promulgation of the final regulations under § 1.1031(k)-1, taxpayers have engaged in a wide variety of transactions, including “parking” transactions, to facilitate reverse like-kind exchanges. Parking transactions typically are designed to “park” the desired replacement property with an accommodation party until such time as the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange. Once such a transfer is arranged, the taxpayer transfers the relinquished property to the accommodation party in exchange for the replacement property, and the accommodation party then transfers the relinquished property to the ultimate transferee.

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